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									        Case 3:07-cv-00488-H-RBB             Document 54   Filed 08/24/2007   Page 1 of 145



 1   BERNSTEIN LITOWITZ BERGER
        & GROSSMANN LLP
 2   DAVID R. STICKNEY (Bar No. 188574)
     (davids@blbglaw.com)
 3   MATTHEW P. SIBEN (Bar No. 223279)
     matthews@blbglaw.com
 4
     12481 High Bluff Drive, Suite 300
 5   San Diego, CA 92130
     Tel: (858) 793-0070
 6   Fax: (858) 793-0323
            -and-
 7   CHAD JOHNSON
     (chad@blbglaw.com)
 8
     1285 Avenue of the Americas
 9   New York, NY 10019
     Tel: (212) 554-1400
10   Fax: (212) 554-1444
11   Attorneys for Lead Plaintiff Arkansas
12   Teacher Retirement System and
     Lead Counsel for the Class
13

14                                UNITED STATES DISTRICT COURT

15                               SOUTHERN DISTRICT OF CALIFORNIA

16   MICHAEL ATLAS and GAIL ATLAS,                     Case No. 3:07-cv-00488-H-RBB
     Individually and On Behalf of All Others
17   Similarly Situated,
                                                       CORRECTED CONSOLIDATED CLASS
18                                                     ACTION COMPLAINT FOR
                   Plaintiffs,                         VIOLATIONS OF THE FEDERAL
19                                                     SECURITIES LAWS
            vs.
20
     ACCREDITED HOME LENDERS
21   HOLDING CO.; JAMES KONRATH;
     JOSEPH J. LYDON; STUART D. MARVIN;
22   JOHN S. BUCHANAN; DAVID E.
23   HERTZEL; and JEFFREY W. CRAWFORD;

24                 Defendants.

25

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                                                                     CORRECTED CONSOLIDATED
                                                                      CLASS ACTION COMPLAINT
                                                                     Case No. 3:07-cv-00488-H-RBB
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 1                                                    TABLE OF CONTENTS
 2                                                                                                                                        Page

 3   I.       OVERVIEW ........................................................................................................................1

 4   II.      FIRST AND SECOND CLAIMS FOR RELIEF -- For
              Violations Of Sections 10(b) And 20(a) Of The Exchange
 5            Act And Rule 10b-5 Against Defendants Accredited, The
              REIT, Konrath, Lydon, Buchanan, Marvin And Crawford .................................................2
 6
              A.        INTRODUCTION ...................................................................................................2
 7
              B.        JURISDICTION AND VENUE ..............................................................................5
 8
              C.        THE PARTIES.........................................................................................................6
 9
              D.        Defendants’ Fraudulent Scheme ............................................................................10
10
                        1.         Background ................................................................................................10
11
                        2.         The Sub-Prime Mortgage Industry Boom
12                                 And Background On The Industry.............................................................12

13                      3.         Accredited Secretly Abandons Its Stated
                                   Underwriting Standards To Grow The
14                                 Volume Of Its Business .............................................................................13

15                                 a.         Accredited Acquires Aames ..........................................................23

16                                 b.         The Individual Defendants Closely Monitored
                                              Accredited’s Loan Originations.....................................................25
17
                        4.         Defendants’ Violations of Accounting Rules
18                                 and Regulations..........................................................................................27

19                                 a.         Defendants’ Manipulation Of Earnings By
                                              Inadequately Reserving For Defaults On Mortgage
20                                            Loans Held By The Company For Investment ..............................28

21                                 b.         Defendants’ Manipulation Of Earnings By
                                              Inadequately Reserving For Real Estate Owned ...........................32
22
                                   c.         Defendants’ Manipulation Of Earnings By
23                                            Inadequately Reserving For Repurchase Losses On
                                              Mortgage Loans Sold To Third Party Investors ............................35
24
                                   d.         Net Effect of Defendants’ Manipulation Of
25                                            Reserves .........................................................................................40

26                                 e.         Defendants’ Manipulation Of Earnings And Its
                                              Balance Sheet By Not Properly Accounting For The
27                                            Aames Acquisition.........................................................................41

28

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 1                      5.         The REIT’s And Accredited’s Collapse And
                                   Near Bankruptcy Resulting From
 2                                 Defendants’ Concealment Of The
                                   Company’s True Financial Condition And
 3                                 Its Undisclosed Contingent Liabilities.......................................................43

 4           E.         Defendants’ False And Misleading Statements .....................................................49

 5                      1.         Defendants’ Statements Before The Class
                                   Period .........................................................................................................49
 6
                        2.         Defendants’ Statements During The Class
 7                                 Period, Before Investors Begin To Learn
                                   The Truth ...................................................................................................50
 8
                        3.         The Marketplace Begins To Learn The
 9                                 Truth Concerning Accredited But
                                   Defendants Continue To Make False And
10                                 Misleading Statements ...............................................................................74

11           F.         Post-Class Period Events .......................................................................................92

12           G.         Loss Causation .......................................................................................................98

13           H.         Presumption Of Reliance .....................................................................................100

14           I.         No Safe Harbor Protection...................................................................................101

15   III.    THIRD CLAIM FOR RELIEF – For Violations Of Section
             14(a) Of The Exchange Act And Rule 14a-9 Promulgated
16           Thereunder Against Defendants Accredited, Konrath,
             Lydon, Gunderson, Pratt, Erickson, Espy, Berglund And
17           Marvin..............................................................................................................................106

18   IV.     FOURTH AND FIFTH CLAIMS FOR RELIEF – For
             Violations Of Sections 11 And 15 Of The Securities Act
19           Against Defendants Accredited, Konrath, Lydon,
             Gunderson, Pratt, Erickson, Espy, And Berglund ...........................................................109
20
             A.         Jurisdiction And Venue........................................................................................110
21
             B.         The Parties ...........................................................................................................111
22
             C.         Background ..........................................................................................................114
23
             D.         The Registration Statement..................................................................................120
24
     V.      SIXTH AND SEVENTH CLAIMS FOR RELIEF – For
25           Violations Of Sections 12(a)(2) And 15 Of The Securities
             Act Against Defendants Accredited, Konrath, Lydon,
26           Gunderson, Pratt, Erickson, Espy, Berglund And Marvin...............................................126

27   VI.     CLASS ACTION ALLEGATIONS – APPLICABLE TO
             ALL CLAIMS..................................................................................................................127
28

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 1   VII.    PRAYER FOR RELIEF – APPLICABLE TO ALL
             CLAIMS ..........................................................................................................................129
 2
     VIII.   JURY DEMAND – APPLICABLE TO ALL CLAIMS..................................................130
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                                                                                                      CORRECTED CONSOLIDATED
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 1           Court-appointed Lead Plaintiff, the Arkansas Teacher Retirement System (“ATRS” or

 2   “Lead Plaintiff”), brings this federal securities law class action on behalf of itself and all other

 3   persons and entities (other than defendants and their affiliates, as specified below) who

 4   purchased or acquired the securities of Accredited Home Lenders Holding Co. (“Accredited” or

 5   the “Company” or “LEND”), including its subsidiary Accredited Preferred Securities Trust I and

 6   its publicly traded subsidiary Accredited Mortgage Loan REIT Trust (the “REIT”), between

 7   November 1, 2005 and March 12, 2007 (the “Class Period”), and who were damaged by the

 8   conduct asserted herein.

 9   I.      OVERVIEW

10           The Consolidated Amended Complaint for Violations of the Federal Securities Laws (the
11   “Complaint”) alleges seven separate claims for relief:
12           •   Claims One and Two allege claims against defendants Accredited, the REIT (as
                 defined herein), James A. Konrath, Joseph J. Lydon, John S. Buchanan, Stuart D.
13               Marvin and Jeff W. Crawford for violations of Sections 10(b) and 20(a) of the
                 Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b), 78t(a)
14               and 78t-1, and the rules and regulations promulgated thereunder, including SEC Rule
                 10b-5, 17 C.F.R. § 240.10b-5 (“Rule 10b-5”).
15
             •   Claim Three alleges that defendants Accredited, Konrath, Lydon, Jody A. Gunderson,
16               Richard T. Pratt, Gary M. Erickson, Bowers W. Espy, James H. Berglund and Marvin
                 violated Section 14(a) of the Exchange Act and SEC Rule 14a-9. Claim Three asserts
17               that the Joint Proxy/Prospectus contained untrue statements of material fact or
                 omitted material facts required to be stated therein or necessary to make the
18               statements therein not misleading.
19           •   Claim Three incorporates by reference the allegations set forth in Claims One and
                 Two. Claims One, Two and Three are set out in ¶¶1-343, 414-421 of the Complaint.
20
             •   Claims Four, Five, Six and Seven allege claims against defendants Accredited,
21               Konrath, Lydon, Gunderson, Pratt, Erickson, Espy and Berglund for violations of
                 Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”), 15
22               U.S.C. §§ 77k, 77l(a)(2) and 77o. These claims are set forth in ¶¶344-421 of the
                 Complaint. Claims Four, Five, Six and Seven arise under the Securities Act and are
23               predicated on a Registration Statement that contained untrue statements of material
                 fact or omitted material facts required to be stated therein or necessary to make the
24               statements therein not misleading. Because Claims Four, Five, Six and Seven are not
                 based upon fraud, these Claims are separate from and do not incorporate the
25               allegations of Claims One, Two or Three.
26

27

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 1   II.      FIRST AND SECOND CLAIMS FOR RELIEF -- For Violations Of Sections 10(b) And
              20(a) Of The Exchange Act And Rule 10b-5 Against Defendants Accredited, The REIT,
 2            Konrath, Lydon, Buchanan, Marvin And Crawford
 3            A.     INTRODUCTION
 4            1.     Accredited is a sub-prime lender.         Prior to and during the Class Period,
 5   Accredited provided mortgages to persons who otherwise would not qualify for such loans in the
 6   conventional market because of poor creditworthiness, the absence of income documentation,
 7   high loan-to-value ratios, or other risk factors.
 8            2.     In the years prior to the Class Period, Accredited reported increasing loan
 9   originations. The Company’s reported net income similarly grew, increasing from just $28.8
10   million in 2002 to $155.4 million in 2005. As a result, the Company’s stock price also increased,
11   trading as high as $58 in May 2006 compared to $7 in 2003.
12            3.     Accredited was supposed to be better than its peers at reducing the risks of sub-
13   prime lending: more conservative; dedicated to disciplined and sustainable growth; committed
14   to strict underwriting policies developed from decades of experience; infused with an
15   overarching goal to produce high quality loans. Defendants repeatedly emphasized these themes
16   in their public statements.
17            4.     For instance, Accredited’s Form 10-K for 2005, filed with the SEC on March 16,
18   2006, purports to explain the Company’s underwriting process and the Company’s focus on
19   disciplined growth and originating loans of high credit quality:
20            We originate loans primarily based upon the borrower’s willingness and ability to
              repay the loan and the adequacy of the collateral. Our experienced management
21            team has developed incentive programs, technology tools and business processes
              that focus our employees on originating non-prime mortgage loans with the
22            financial and other characteristics that generate profits for us. We believe that this
              business approach has contributed to our disciplined growth in both origination
23            volume and profits.
24                                              *        *      *
25            We believe that our commitment to originating high-quality loans strengthens our
              relationships with warehouse line providers, whole loan purchasers, rating
26            agencies and others with whom we do business.
27                                              *        *      *
28

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 1          We believe these strengths enable us to originate better-performing, non-prime
            loans, and grow a more profitable, more conservatively managed company than
 2          many of our competitors.

 3          5.      Similarly, in a letter to shareholders included in the Company’s annual report,

 4   defendants Lydon and Konrath wrote:

 5                 The quality of the portfolio is another focus at Accredited that will
            continue to differentiate us.
 6
                                              *      *       *
 7
                    This unique approach enables us to constantly track the factors that impact
 8          portfolio quality, maintain an “early warning system” to spot problems in the
            portfolio, and implement the changes necessary to fix those problems in order to
 9          maintain superior portfolio quality.

10          6.      In truth, however, defendants engaged in a fraudulent scheme to artificially inflate

11   the Company’s loan volume and reported earnings by purposefully disregarding the Company’s

12   underwriting policies and procedures. While this scheme had the short-term effect of enabling

13   defendants to inflate the Company’s reported financial results, it also put the Company at great,

14   undisclosed risk. In originating these risky loans, the Company violated the representations and

15   warranties that the Company had made when the Company sold and/or securitized the loans.

16   When borrowers defaulted, the purchasers of the Company’s loans discovered the Company had

17   violated its representations and warranties. The Company, not the purchasers, was forced to

18   shoulder the burden of the losses.

19          7.      The defendants artificially inflated the Company’s reported income by

20   manipulating the Company’s reserves for bad loans in violation of Generally Accepted

21   Accounting Principles (“GAAP”). These manipulations of reserves inflated the Company’s pre-

22   tax income by no less than $631.66 million during the Class Period. Additionally, the Company

23   overstated income by $142.4 million in the fourth quarter of 2006 by improperly accounting for

24   its acquisition of Aames Investment Corporation (“Aames”). Thus, during the Class Period,

25   defendants fraudulently caused the Company to overstate income by $774.06 million.

26          8.      According to a former Accredited Corporate Underwriter – whose testimonial is

27   corroborated by that of numerous other former employees – the Company’s underwriting

28   policies were not followed as defendants publicly claimed: “The problem with the whole system

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 1   was the overrides. The overrides were rampant, especially during the last few days of each

 2   month when they wanted to ramp up production. During those last few days of the month it was

 3   balls to the wall to get loans approved. If the borrower breathed, he got the loan.” 1
 4            9.     The Company’s management constantly overrode the decisions of its appraisers –

 5   inflating appraisals to allow borrowers to qualify for loans under the Company’s stated

 6   underwriting policies for loan-to-value ratios.     According to the Company’s former Chief

 7   Appraiser: “As of June 2006, between 12% and 15% of our business was being done through

 8   management overrides.”

 9            10.    According to the Company’s own filings with the SEC, each month the Company

10   performed an extensive re-underwriting of a random sampling of the loans originated by the

11   Company with the results reported to, among others, defendants Konrath, Lydon, and Crawford.

12   The Company’s own software also specifically tracked – and made available to defendants at all

13   times – high risk loans that were approved over the decision of an underwriter to reject the

14   application because the loan did not comply with Company underwriting policy.              Former

15   employees confirm that the Individual Defendants received these and other monthly reports

16   detailing numerous facets of the Company’s loan portfolio, as set forth in more detail herein.

17            11.    Defendants also knew about the rampant overrides of appraisals. Accredited had

18   a custom-built appraisal review and tracking system that tracked management overrides of

19   appraisers’ decisions. Defendant Crawford received a report each month specifically detailing

20   the amount of appraisal overrides in the prior month. This was done because inflation of

21   appraisals became a huge problem for the Company. When loans defaulted, the Company was

22   forced to buy back loans with inflated appraisals. It was a “major issue,” according to the former

23   Chief Appraiser at the Company.

24            12.    By the end of the Class Period, the market started to learn the truth of the

25   Company’s financial health through reports of skyrocketing default rates and repurchase

26   requirements and a severely diminished valuation of the Company’s loan portfolio. Investors no

27

28   1   Throughout, emphasis has been added, unless otherwise indicated.
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 1   longer believed management’s exhortations that the Company was dedicated to credit quality and

 2   conservative, disciplined growth.    As one analyst put it, “in order for investors to remain

 3   comfortable owning a subprime mortgage company, management credibility is paramount.”

 4   “[W]e believe [Accredited’s] management has lost credibility.”

 5          13.    After the Class Period, on August 2, 2007, the Company belatedly filed with the

 6   SEC its Form 10-K for 2006. In the Form 10-K, which the Company filed 4.5 months late, the

 7   Company admitted that certain of the defendants’ Class Period statements had been false,

 8   including the Company’s reported income in 2006.           In the Form 10-K, the Company

 9   substantially increased reserves for bad loans as of December 31, 2006, which defendants had

10   understated during the Class Period in order to manipulate the Company’s reported earnings.

11   Moreover, the Company disclosed for the first time that the amount of delinquencies in its

12   mortgage loan portfolio held for investment had increased to $316.3 million from only $136.8

13   million in the prior quarter and $71.3 million in the prior year. Furthermore, the Company

14   admits in the Form 10-K that it had improperly accounted for the acquisition of Aames, resulting

15   in a $142.4 million overstatement of the Company’s previously reported income. As set forth

16   further herein, these disclosures after the Class Period demonstrate that certain of defendants’

17   statements during the Class Period were false and misleading.

18          14.    Defendants’ scheme artificially inflated the price of the Company’s stock. As a

19   result of multiple disclosures concerning the true financial condition of the Company, the

20   artificial inflation in the price for the Company’s securities was removed. The Company’s stock

21   closed at only $3.97 per share on the day after the Class Period, after having traded at over $50

22   for much of the Class Period.

23          B.     JURISDICTION AND VENUE

24          15.    This Claim arises under Sections 10(b), 20(a) and 14(a) of the Exchange Act, 15

25   U.S.C. §§ 78j(b), 78t(a) and 78n(a), and the rules and regulations promulgated thereunder,

26   including SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (“Rule 10b-5”) and SEC Rule 14a-9, 17

27   C.F.R. § 240.141-9 (“Rule 14a-9”).

28

                                                                         CORRECTED CONSOLIDATED
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 1           16.     This Court has jurisdiction over the subject matter of this action pursuant to

 2   Section 27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331, because this is a civil

 3   action arising under the laws of the United States.

 4           17.     Venue is proper in this district pursuant to Section 27 of the Exchange Act, 15

 5   U.S.C. § 78aa. At all relevant times, Accredited maintained its headquarters and principal place

 6   of business in this District. Many of the acts and transactions that constitute the violations of law

 7   complained of herein, including the dissemination to the public of untrue statements of material

 8   facts, occurred in this District.

 9           18.     In connection with the acts alleged in the Complaint, defendants, directly or

10   indirectly, used the means and instrumentalities of interstate commerce, including, but not

11   limited to, the United States mails, interstate telephone communications and the facilities of

12   national securities exchanges.

13           C.      THE PARTIES

14                   Plaintiffs
15           19.     Court-appointed Lead Plaintiff, the Arkansas Teacher Retirement System

16   (“ATRS” or “Lead Plaintiff”), was established in 1937 to provide retirement benefits to the

17   employees of the state’s education community. For the fiscal year ending June 30, 2006,

18   ATRS’s total assets equaled $11.27 billion with 85,916 active members and 24,050 retirees

19   receiving benefits through the system. During the Class Period, ATRS purchased Accredited

20   common stock. As a result of these purchases and the violations of the securities laws alleged

21   herein, ATRS suffered substantial damages. On June 25, 2007, the Court appointed ATRS as

22   Lead Plaintiff in this litigation.

23           20.     Plaintiff William F. Kornfeld (“Kornfeld”) acquired 561 shares of Accredited

24   common stock in exchange for 6,000 shares of Aames common stock pursuant to Accredited’s

25   acquisition of Aames and, as a result, and because of the violations of the securities laws alleged

26   herein, Kornfeld suffered substantial damages.

27

28

                                                                           CORRECTED CONSOLIDATED
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 1                   Defendants
 2           21.     Accredited Home Lenders Holding Co. (“Accredited” or the “Company” or

 3   “LEND”) is a mortgage banking company operating throughout the United States and in Canada.

 4   The Company originates, finances, securitizes, services and sells sub-prime (a/k/a non-prime)

 5   mortgage loans secured by residential real estate. Accredited focuses on borrowers who may not

 6   qualify for loans from traditional banking entities because of higher loan-to-value ratios, the

 7   nature or absence of income documentation, limited credit histories, high levels of consumer

 8   debt, or past credit difficulties.

 9           22.     Accredited Mortgage Loan REIT Trust (the “REIT”) is an indirect subsidiary of

10   Accredited and Accredited Home Lenders, Inc. (“AHL”). AHL is a wholly owned subsidiary of

11   Accredited. The REIT was formed on May 4, 2004 as a Maryland real estate investment trust.

12   The REIT engages in the business of acquiring, holding, financing, and securitizing non-prime

13   mortgage loans secured by residential real estate. Generally, the REIT acquires mortgage assets

14   and assumes related funding obligations from AHL, which are accounted for at AHL’s carrying

15   value, as contributions of capital from AHL.       These mortgage assets consist primarily of

16   residential mortgage loans, or interests in these mortgage loans, that have been originated or

17   acquired by AHL. All of the outstanding common shares of the REIT are held by AHL. AHL is

18   excluded from the Class. The REIT also issued preferred stock to the general public that is

19   traded on the New York Stock Exchange. Purchasers of the REIT preferred stock are members

20   of the proposed Class.

21           23.     James A. Konrath (“Konrath”) is a founder of the Company and was at all

22   relevant times Chairman of the Board and Chief Executive Officer of Accredited and part of its

23   Executive Management. In this capacity, Konrath signed certain of the Company’s false and

24   misleading filings with the SEC (including the 2005 Form 10-K), participated in drafting and/or

25   approved the Company’s false and misleading press releases, met with analysts and media to

26   discuss the Company, and participated in the Company’s conference calls with analysts and

27   investors. Prior to founding Accredited, Mr. Konrath was the President and Chief Executive

28   Officer of Security Pacific Financial Services, Inc., where he managed over 1,900 people in more

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 1   than 300 consumer finance offices, from 1986 to 1989. From 1983 to 1986, Mr. Konrath was the

 2   President and Chief Executive Officer of Security Pacific Housing Services, where he founded a

 3   new subsidiary focused on manufactured housing loans. Mr. Konrath earned a Bachelor of Arts

 4   degree in Accounting with a minor in Economics from the University of Wisconsin—

 5   Whitewater in 1969. Defendant Konrath also served as CEO and Chairman of the REIT during

 6   the Class Period and signed SEC filings on behalf of the REIT.

 7          24.    Joseph J. Lydon (“Lydon”) was at all relevant times President and Chief

 8   Operating Officer of Accredited and served on the Company’s Board of Directors and part of the

 9   Company’s Executive Management. In this capacity, Lydon signed certain of the Company’s

10   false and misleading filings with the SEC (including the 2005 Form 10-K), participated in

11   drafting and/or approved the Company’s false and misleading press releases and participated in

12   the Company’s conference calls with analysts and investors. Mr. Lydon is a veteran of more

13   than two decades in the mortgage banking industry, having joined Accredited in 1997 from Ford

14   Consumer Finance, a division of The Associates First Capital Corporation, where he served as

15   Executive Vice President for the western division from 1993 to 1997. From 1977 to 1993, Mr.

16   Lydon worked at Security Pacific Financial Services, Inc., rising to the level of Senior Vice

17   President in charge of six operating divisions. Mr. Lydon earned a Bachelor of Science degree in

18   Management from Pepperdine University in 1991. Defendant Lydon also served as President and

19   Chief Operating Officer of the REIT during the Class Period.

20          25.    Stuart D. Marvin (“Marvin”) was at all relevant times Executive Vice President of

21   Accredited and labeled by the Company as part of its Executive Management. In this capacity,

22   Marvin spoke at investor conferences, approved certain of the Company’s false and misleading

23   filings with the SEC, participated in drafting and/or approved the Company’s false and

24   misleading press releases and participated in the Company’s conference calls with analysts and

25   investors. Mr. Marvin joined Accredited in April 2005 and oversees Finance, Capital Markets

26   and Corporate Communications. Mr. Marvin has over 23 years of experience in the financial

27   services and non-prime mortgage industry.      Prior to joining Accredited, he was President,

28   Corporate Operations and Chief Financial Officer for Aegis Mortgage Corporation and a partner

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 1   at PriceWaterhouseCoopers, LLP focusing on mortgage banking and financial institutions. Mr.

 2   Marvin is a Certified Public Accountant and earned a Bachelor of Science degree with honors in

 3   Accounting from Jacksonville (FL) University (1982). Mr. Marvin also served as Executive

 4   Vice President and Secretary of the REIT during the Class Period and signed SEC filings on

 5   behalf of the REIT.

 6          26.    John S. Buchanan (“Buchanan”) was at all relevant times Chief Financial Officer

 7   of Accredited. As Accredited’s CFO, Buchanan signed certain of the Company’s false and

 8   misleading filings with the SEC (including the 2005 Form 10-K), participated in drafting and/or

 9   approved the Company’s false and misleading press releases and participated in the Company’s

10   conference calls with analysts and investors. Prior to joining Accredited, Mr. Buchanan was

11   Controller of GreenPoint Credit, a non-prime consumer finance entity, from 1998 to 2001, where

12   he was responsible for accounting, planning, financial analysis, cash management, and facilities.

13   From 1992 to 1998, Mr. Buchanan was Senior Vice President and Chief Financial Officer of

14   GreenPoint Credit’s predecessor, BankAmerica Housing Services. From 1981 to 1990, Mr.

15   Buchanan worked for Security Pacific Financial Services, Inc., where he became Vice President

16   of Financial Planning and Analysis. Mr. Buchanan earned a Bachelor of Science degree in

17   Business in 1978 from San Diego State University. Defendant Buchanan also served as CFO of

18   the REIT during the Class Period and signed SEC filings on behalf of the REIT.

19          27.    Jeff W. Crawford (“Crawford”) was at all relevant times Director of Operations at

20   Accredited.   During the Company’s annual investor conference on September 27, 2006,

21   Crawford described his job as follows:

22          As Director of Operations, I oversee directly our underwriting and loan
            fulfillment functions through each of our originations channels. And at the same
23          time I’m responsible for our servicing platform and our portfolio performance.
            So that puts me in a position to have clear visibility into all of the moving parts
24          and effects what’s necessary on the front lines in the credit risk assessment
            component in response to what we’re observing in the performance of the
25          portfolio.

26   As the Company’s Director of Operations, Crawford participated in drafting and/or approved the

27   Company’s false and misleading press releases and SEC filings and participated in certain of the

28   Company’s meetings with analysts and investors.

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 1          28.       Defendants Konrath, Lydon, Marvin, Buchanan and Crawford are collectively

 2   referred to herein as the “Individual Defendants.”

 3          29.       In addition to their normal salary, the Individual Defendants stood to receive

 4   bonus and stock compensation as follows contingent upon the Company obtaining certain net

 5   income levels:

 6                 Net Income After Tax                             Potential Award
                                                                  (Pct. of base salary)
 7             Dollars           Percentage of 2006            Cash              Stock Award
 8          (in millions)         Operating Plan
               $105.2                   60%                    25%                    0%
 9             $131.6                   75%                    67%                    0%
               $175.4                  100%                    125%                  140%
10             $192.9                  110%                    125%                  170%
               $210.5                  120%                    125%                  200%
11
               $228.0                  130%                    125%                  225%
12             $245.6                  140%                    125%                  245%
               $263.1                  150%                    125%                  260%
13             $280.6                  160%                    125%                  275%
14
            D.        Defendants’ Fraudulent Scheme
15
                      1.     Background
16
            30.       Defendant Konrath founded Accredited in 1990 in San Diego. In 2003, the
17
     Company became public.
18
            31.       Like many sub-prime lenders, Accredited operated via two principle units, retail
19
     and wholesale. The wholesale unit operated through 15 division offices throughout the United
20
     States and in Canada and originated loans through a network of mortgage brokers. The retail
21
     division included numerous offices throughout the United States and originated loans directly to
22
     borrowers.
23
            32.       Loan “origination” is the process by which a lender obtains new loans. This
24
     includes: qualifying borrowers; appraising collateral; processing documents; loan underwriting;
25
     funding of the loan and recording the debt onto title.
26
            33.       “Underwriting” is the credit analysis preceding the granting of a loan, based on
27
     credit information furnished by the borrower, such as employment history, salary, and financial
28

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 1   statements; publicly available information, such as the borrower’s credit history, which is

 2   detailed in a credit report; and the lender’s evaluation of the borrower’s credit needs and ability

 3   to pay.

 4             34.    To fund loans that the Company originated, the Company maintained credit

 5   facilities with warehouse lenders. Generally speaking, warehouse lenders are commercial banks

 6   or other corporate entities that lend money to a mortgage bank, such as Accredited, so that the

 7   mortgage bank can cover the mortgage loans it extends to home buyers. Thus, the Company

 8   could borrow from these credit facilities to fund loans originated by the Company, and the loans

 9   originated by Accredited would serve as collateral for the debt incurred under the credit facility.

10   When loans serving as collateral lose value, the Company’s warehouse lenders make a margin

11   call that requires the Company to pay cash back to the warehouse lender.

12             35.    After originating a loan, Accredited would generally do one of two things with the

13   loan. The loan would either be securitized or it would be sold. Once loans were sold or

14   securitized, the proceeds would be used to pay off the debt incurred under the credit facilities.

15             36.    Securitization is a form of structured finance in which pools of loans are packaged

16   and sold to an independent entity, which raises money to finance the purchase by issuing notes or

17   some other security backed by the pool of loans. The Company describes its securitizations in its

18   Form 10-K as follows:

19             In a securitization, we may sell or transfer a pool of loans to a trust and retain a
               residual interest for the right to receive future cash flow. The trust raises the cash
20             purchase price of the loan pool by selling asset-backed securities, or notes,
               representing senior interests in the loans. The purchasers of these interests
21             receive the principal collected on the loans plus a fixed or adjustable interest rate
               as stated in the particular note. The residual interest we retain entitles us to
22             receive the interest income generated on the principal amount of the loans in the
               trust minus the interest paid to the purchasers of the loan interests, servicing, trust
23             and other fees and losses on the loans, provided that certain overcollateralization
               requirements are met. Depending upon the structure of the asset-backed securities
24             and the performance of the underlying mortgage loans, excess cash flow may not
               begin to be distributed to us for 12 months or more. As a result of the
25             overcollateralization and certain other credit enhancement features, the trust is
               able to issue investment-grade, asset-backed securities.
26
               37.    Accredited provided purchasers of its mortgage loans with representations and
27
     warranties regarding the underwriting standards the Company followed in originating the loans.
28
     If a purchaser of the mortgage loans determined that Accredited violated its representations and
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 1   warranties OR a borrower defaulted during the early months of the loan, the purchaser could

 2   require Accredited to repurchase the mortgage loan.

 3           38.    Throughout the Class Period, Accredited and the Individual Defendants publicly

 4   pronounced the Company’s commitment to credit quality as part of their corporate culture, called

 5   “The Accredited Way.”       According to defendants, this commitment to credit quality set

 6   Accredited apart from other sub-prime lenders.

 7           39.    For example, Accredited’s website proclaims the Company’s commitment to

 8   disciplined, profitable growth without sacrificing credit quality in order to inflate the volume of

 9   the Company’s loan portfolio:

10           The Accredited Way
11           Corporate culture and integrity are integral to the tight-knit Accredited fabric,
             where empowerment, leadership, commitment to quality, excellence, and
12           teamwork are more than workplace buzzwords. Unlike competitors, Accredited
             compensates employees on margin, quality, and profit, not volume.
13
             Key strengths that distinguish us from other non-prime lenders include:
14
             Experienced Management: More than 50 managers and executives have 20+ years
15           of industry experience each. Accredited’s three senior executives have a
             combined total of 80 years of experience in the mortgage industry.
16
             Diversified Approach: Accredited strives to diversify its originations, financing
17           sources, and loan dispositions.

18           Profit Culture: Internally, Accredited emphasizes rewarding quality and results,
             not volume and activity. Incentives are based on being able to meet customers’
19           needs profitably and are offered at all levels of the organization. The profit
             culture includes credit disciplines and portfolio quality, as well as strong cost
20           disciplines.
21           40.    The Company’s stated credit discipline and portfolio quality were metrics closely

22   monitored by equity analysts covering the Company prior to and during the Class Period. Such

23   analysts issued influential reports to investors recommending that they buy the Company’s

24   securities.

25                  2.     The Sub-Prime Mortgage Industry
                           Boom And Background On The Industry
26
             41.    In the years before the beginning of the Class Period, Accredited and its main
27
     competitors within the sub-prime industry grew at an explosive pace. According to the Federal
28

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 1   Deposit Insurance Corporation, the volume of sub-prime mortgage loans originated in the United

 2   States rose more than six-fold to $213 billion in 2002 from just $35 billion in 1994. Industry

 3   growth continued unabated in the years leading up to 2006. Sub-prime loans made up 12.75% of

 4   the $10.2 trillion mortgage market in 2006, up from 8.5% in 2001.

 5          42.    In the years prior to the Class Period, Accredited grew even faster than the sub-

 6   prime industry. The total volume of loans that Accredited originated increased to $12.422 billion

 7   in 2004 from just $1.517 billion in 2000, a compound annual growth rate of almost 70%.

 8                                 Year          Origination Volume (in
                                                       $ billions)
 9                                 2000                  $1.517
                                   2001                  $2.324
10                                 2002                  $4.303
                                   2003                  $7.958
11                                 2004                 $12.422
12                 3.      Accredited Secretly Abandons Its Stated
                           Underwriting Standards To Grow The Volume Of Its Business
13

14          43.    With this boom in the sub-prime market as a backdrop, defendants grew

15   Accredited’s business into one of the largest sub-prime lenders in the country. Defendants also

16   asserted that the Company could conservatively grow earnings 15% a year over the long run.

17          44.    At all relevant times, Accredited made money by selling or securitizing the loans

18   it originated. These investors who bought Accredited’s loans were enticed by the premium

19   interest rates that could be charged to borrowers in the sub-prime market. Prior to the second

20   half of 2006, investors who bought or participated in securitizations of Accredited’s loans only

21   reviewed a very small percentage of the loans being sold or securitized (approximately 2%-3%

22   according to Confidential Witness CW3, see infra ¶¶56-57). Default rates were at historic lows

23   as home prices increased. Moreover, Accredited was required to buy back faulty loans from

24   investors if the loans did not comply with the Company’s underwriting standards. Within this

25   context, investors buying loans from Accredited did not review 97% to 98% of the loans they

26   bought from Accredited.

27          45.    In 2005, contrary to their representations to the marketplace, defendants caused

28   the Company’s employees to disregard Accredited’s stated underwriting guidelines in an effort

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 1   to increase the volume of loans that Accredited originated. As detailed below, the exceptions to

 2   the Company’s policies were so numerous that they became the rule.

 3          46.     For a time, the fraudulent scheme was a success. Investors buying loans from

 4   Accredited did not closely scrutinize the loans. Loan volume increased, and delinquency and

 5   default rates did not immediately skyrocket.       Delinquency and default rates lagged behind

 6   changes in underwriting policies by approximately six months or more. Defendant Lydon told

 7   investors on the Company’s February 14, 2007 conference call: “Generally, there’s roughly a

 8   six-month lag before we see repurchases resulting from the sale of loans.” Moreover, borrowers

 9   were able to refinance loans rather than defaulting. Thus, as the Company originated more loans

10   and sold (or securitized) those loans to investors, Accredited’s earnings increased dramatically.

11   Defendants projected future earnings increases of 15% a year on the basis of the Company’s

12   artificially inflated loan volume.

13          47.     However, by the third quarter of 2005, defendants began to falsely inflate

14   Accredited’s reported earnings and originate loans that did not conform to the Company’s own

15   underwriting guidelines.

16          48.     Confidential Witness 1 (“CW1”) was a Corporate Underwriter at Accredited

17   between June 2004 and March 2005. CW1 worked within Accredited’s wholesale channel in the

18   St. Petersburg office and reported to Rich Renaud, who reported to Credit Manager Luis

19   Zendejas. As a Corporate Underwriter, CW1’s job was to review loan files and accept or deny

20   applications based on the borrower’s creditworthiness and Accredited’s underwriting guidelines.

21   According to CW1, his underwriting decisions were frequently overridden by managers on the

22   sales side of the business. CW1 noted such loans were tracked internally at the Company, and it

23   was well-known they performed poorly. Moreover, according to CW1, by no later than the early

24   part of 2005, the Company approved risky loans that did not comply with its own underwriting

25   guidelines in an effort to reach monthly production targets. As discussed below, witnesses detail

26   pervasive, widespread exceptions to the Company’s underwriting policies and substantial

27   pressures to approve such loans at the end of reporting periods in an effort to meet financial

28   projections.

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 1          49.    The Company closely monitored loans that underwriters first denied but which

 2   were approved by more senior management, as is detailed further in Section II.D.3.b. According

 3   to CW1 and CW11 (described below), the Company maintained a database (accessible by only

 4   Accredited personnel and not by purchasers of the Company’s loans) that contained the
 5   underwriter’s (and others’) notes concerning each loan and which documented the reasons

 6   underwriters denied specific loans. According to CW1, a number of loans on which his denial

 7   was overridden included explicit notes delineating glaring problems with the loan application

 8   such as: (1) the borrower was acting as a “straw borrower” for someone else; (2) employment

 9   could not be verified; (3) income claimed on a stated-income loan was way above that which

10   could be possible for the stated job title; and (4) multiple exceptions to Accredited’s

11   underwriting guidelines regarding debt-to-income, minimum credit score, loan-to-value, and/or

12   previous employment history.

13          50.    Confidential Witness 2 (“CW2”) worked in Accredited’s San Diego office from

14   1998 until December 2006. Initially, CW2 held the position of loan underwriter until 2003,

15   when CW2 became a National Sales Manager. From September 2006 until December 2006,

16   CW2 worked within Loss Mitigation.         National Sales, which was based in San Diego,

17   underwrote loans originated by mortgage brokers across the country.

18          51.    CW2 was strongly encouraged to “push loans through” and the pressure to

19   approve loans, regardless of quality, was especially bad during the period from mid-2005 until

20   CW2 left at the end of 2006. According to CW2, “The pressure became so bad, I felt like they

21   were undermining my integrity.”

22          52.    CW2 transferred from the position as National Sales Manger to Loss Mitigation to

23   avoid the pressures to approve bad loans.         In Loss Mitigation, CW2 reported to Tom

24   Cooperstein, a Vice President within Wholesale Production. Cooperstein, in turn, reported to

25   Jim Voisard, Director of Wholesale Production since September 2004.

26          53.    CW2 researched and created reports on Accredited’s defaulted loans, which

27   included loans ranging from first payment default (FPD) to foreclosure situations. According to

28

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 1   CW2, Accredited’s upper-level management received monthly “profit and loss reports” that

 2   showed, among other things, the estimated loss to the entire Company from defaulted loans.

 3           54.      According to CW2, Accredited’s upper-level management – including defendants

 4   – knew about the extensive use of overrides to get loans approved. According to CW2, “They

 5   absolutely knew about the degree of overrides. I used to get e-mails from Joe Lydon about what

 6   type of crap was going on and the losses we were taking.”

 7           55.      Like other confidential witnesses, as detailed herein, CW2 expressed that the

 8   Company’s growing problem with bad loans was attributable to management overrides of the

 9   underwriting and appraisal process.

10           56.      Confidential Witness 3 (“CW3”) was a Corporate Underwriter at Accredited

11   between August 2003 and February 2006 in Tampa, Florida, who reported to Credit Manager

12   Richard Renaud, who in turn reported to Luis Zendejas. As a Corporate Underwriter, CW3’s job

13   was to review loan files to spot any inconsistencies in data or violations of Accredited’s lending

14   policies.     Like other Confidential Witnesses who acted as underwriters, CW3 witnessed a

15   tremendous decrease in the quality of Accredited’s underwriting and, like other confidential

16   witnesses, CW3’s decisions to reject loan applications were constantly overridden by Operations

17   Managers and Senior Operations Managers.

18           57.      According to CW3: “The problem with the whole system was the overrides. The

19   overrides were rampant, especially during the last few days of each month when they wanted to

20   ramp up production. During those last few days of the month it was balls to the wall to get loans

21   approved. If the borrower breathed, he got the loan.”

22           58.      Confidential Witness 4 (“CW4”) was a Regional Manager in the retail lending

23   division of Accredited who worked at the Company from January 2005 through December 2005.

24   CW4 worked in Accredited’s largest and most profitable region, Orange County, and supervised

25   six retail branches and over fifty employees. CW4 reported to Divisional Manager of retail

26   lending, Chuck Biggs. Biggs reported to Joseph Rutter, Director of Retail Operations.

27           59.      According to CW4, Accredited was very aggressive in lending to persons with

28   very bad credit. Contrary to defendants’ statements to the marketplace, Accredited was just as

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 1   reckless as others in the sub-prime space when it came to underwriting risky loans. According to

 2   CW4, “We were pretty aggressive in our lending, but it was on par with what the other sub-

 3   prime lenders were doing. You could get a loan one day out of bankruptcy. You could get a

 4   loan at 100% loan-to-value. We even had a program where you could get a loan at more than

 5   100% loan-to-value.”

 6          60.     Notably, according to CW4, the Company’s underwriting guidelines were

 7   frequently overridden by senior management. Overrides on individual loans were frequently

 8   approved by persons as high as the Director of Retail Operations, Joseph Rutter. According to

 9   CW4, Rutter and others in senior management approved loans that did not comply with

10   Accredited’s underwriting guidelines because in 2005 institutional investors only reviewed a

11   small fraction of the loans that they purchased from Accredited. Because only a small fraction of

12   the loans being purchased were reviewed, Accredited’s senior management – according to CW4

13   – “hoped that the investors wouldn’t check the loan file. They sort of slipped it in there. They

14   figured that even if the loan did get caught by the investors, Accredited could always securitize it

15   instead of selling it as a whole loan.”

16          61.     At the end of each month and at the end of financial reporting periods, the

17   Company made increasing exceptions to its underwriting standards to inflate the volume of loans

18   originated in an attempt to meet financial projections. According to CW4, Accredited’s lending

19   became especially aggressive towards the end of each month, as the branches were trying to hit

20   their monthly loan volume targets. For example, Accredited’s retail branches would even fund

21   loans at the end of a month where the borrower had not yet supplied all of the required

22   documentation. In CW4’s own words: “The underwriting was pretty damn aggressive towards

23   the end of the month. That is when they would pull the trigger and start funding lots of things.”

24   CW4’s account is corroborated by that of CW1 and CW5 (identified below).

25          62.     Confidential Witness 5 (“CW5”) was a Corporate Underwriter at Accredited in

26   San Diego between May 2002 and November 2006. CW5’s job was to review, and either

27   approve or deny, applications for sub-prime mortgage loans. When CW5 began working at

28   Accredited, the Company’s underwriting procedures were followed and the Company did solid

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 1   loans. However, according to CW5, by 2005 the Company’s underwriters who reviewed and

 2   approved or denied loans were being overridden, frequently resulting in the Company making

 3   many loans that did not comply with its own underwriting guidelines. According to CW5, the
 4   number of overrides grew to be so large that, in 2005, the Company was forced to institute a
 5   system to track such overrides, which included a box on the loan file that needed to be checked
 6   off by an underwriter if the loan was approved “as a business decision” by a higher-level
 7   manager over the recommendation of the underwriter to reject the application.
 8          63.     Management at the Company overrode underwriters’ decisions to reject bad loans

 9   in order to meet its financial forecasts, which were the basis for Wall Street’s earnings

10   expectations. According to CW5, whenever the Company was behind in making its projected

11   numbers, upper-level managers would pressure the underwriters to approve loans that did not

12   qualify under the Company’s underwriting guidelines. According to CW5: “If we were down

13   and needed to crank up our numbers, upper management would pressure us to approve loans that

14   otherwise would not have been approved. Senior managers would come and beat on my head.

15   We were pressured to approve loans where there was no mitigating value except to get the loan

16   on the books. Some of the loans were not even profitable – the pricing was a giveaway.”

17          64.     The problem of originating bad credit-quality loans grew during the Class Period.

18   According to CW5, in the early part of 2006 the Company was increasingly originating

19   “questionable” loans, and underwriters who worked on these loans were being “favored because

20   they produced more loans.” Contrary to defendants’ public statements, employees had “a great

21   deal of financial incentive to get deals done” and this was especially true after (approximately)

22   August 2006, at which time Accredited changed its compensation scheme so that Account

23   Executives were compensated regardless of loan quality, which increased the origination of non-

24   compliant, bad credit-quality loans.

25          65.     Confidential Witness 6 (“CW6”) was an Underwriter and Corporate Underwriter

26   at Accredited in California between March 2001 and December 2006.               CW6 began as

27   underwriter and held that position for three years before working for one year in Accredited’s IT

28   department. CW6 became a Corporate Underwriter in August 2005, working in San Diego and

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 1   reporting to Richard Brooks. CW6 was laid off in December 2006 because, according to CW6,

 2   CW6 had been vocal about Accredited’s credit quality problems and the extent to which the sales

 3   staff was overriding credit decisions made by underwriters.

 4          66.     According to CW6, the Company’s underwriting and loan quality after August

 5   2005 was much worse than it was earlier before CW6 had worked in the IT department.

 6   According to CW6: “Around August 2005 is when I became really aware of how bad it was.

 7   When I returned to underwriting, I thought that the loan files were going to look the same as they

 8   did before – but they had gotten much worse.”

 9          67.     According to CW6, corporate underwriters repeatedly tried to challenge loans that

10   were almost certainly bad credits. Yet, each time they challenged a loan, their objections were

11   shot down by credit managers or sales managers, including Susan Englert, Steve Mosteller, and

12   Richard (Rick) Harway. CW6 elaborated: “Over and over again we tried to challenge these

13   loans and were told ‘You have to go forward with it.’ If you made a big stink about it, they

14   would raise their eyebrows and say, ‘Do you want a job?’”

15          68.     According to CW6, salespersons constantly overrode the decisions being made by

16   underwriters. According to CW6, “Giving the salespeople signing authority made appraisal

17   review and corporate underwriting into a laughingstock.”

18          69.     Confidential Witness 7 (“CW7”) was a Corporate Underwriter at Accredited

19   between June 19, 2000 and March 23, 2007 in the Company’s San Diego offices and later in the

20   Company’s Austin, Texas office after April 2006. CW7 reviewed document preparation and

21   reviewed loans prior to document preparation and provided guidance on whether loans should be

22   approved or denied. After being transferred to Austin, CW7 managed the funding division of the

23   company’s Alt-A lending program, supervising eight employees. 2
24          70.     According to CW7, the sales side of the California Division was run by Richard

25   Harway, Gregory Salomon and Steve Mosteller who placed enormous pressure on her and other

26

27
     2  Alternate “A” quality mortgages are loans to borrowers considered low-risk but who cannot
28   satisfy all of the conditions for receiving a prime loan; oftentimes alternate “A” loans are made
     when a borrower cannot provide all of the documentation required for a prime loan.
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 1   underwriters to approve loan files, especially at the end of a month when the Account Executives

 2   needed to make their quotas. CW7 explains: “At the end of the month, we were handed loan

 3   files and told to just sign them with no audit.”

 4          71.     According to CW7, the Company approved many loans of a dubious nature. For

 5   instance, according to CW7, inflated income on “stated-income” loans was a most common

 6   problem and it was not unusual to see housekeepers who claimed to make $8,000 per month or

 7   landscapers who claimed to make $10,000 or $12,000 per month. Inflated property appraisals

 8   were another common problem, as were suspicious CPA letters used to verify self-employment,

 9   according to CW7.

10          72.     According to Confidential Witness 8 (“CW8”), Accredited’s lending practices

11   were no better during the end of 2006 or early 2007 (despite defendants’ statements that the

12   Company was tightening its standards). CW8 was a former Senior Corporate Underwriter and

13   Corporate Auditor at Accredited who worked in Austin, Texas, and reported to Corporate

14   Underwriting Managers Liz Emerson and Will Shipp. CW8 joined the company in December

15   2006 and was fired in March 2007. CW8 was fired because he was “turning down too many

16   loans.” According to CW8, Account Executives (a/k/a/ “AEs”) who originated loans made no

17   effort to ensure that they were making quality loans. According to CW8: “The AEs were just

18   trying to make money. As an AE, you could lose your job for not having enough deals.

19   Accredited just wanted to show income; they wanted to show loans coming in. If a loan was

20   turned down in subprime, they tried to make it work in Alt-A. If it was turned down in Alt-A,

21   they tried to make it work in subprime.”

22          73.     Another means by which the defendants were able to grow the volume of total

23   loans originated was by relaxing collateral requirements for loans. This was done by falsifying

24   and/or manipulating property appraisals so they would purport to comply with the Company’s

25   underwriting policies.

26          74.     Confidential Witness 9 (“CW9”) was the Chief Appraiser at Accredited for five

27   years between 2002 and June 2007, during which he worked at the Company’s headquarters in

28   San Diego and reported to Luis Zendejas, the head of corporate underwriting.         CW9 was

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 1   involved in the, as he put it, “CSI” type of investigations to show to defendant Crawford how the

 2   collateral side of business was affected by the wrong appraisal value decisions made by sales

 3   managers that also helped cause loan performance to fail. CW9 also worked with the Capital

 4   Markets department in the repurchases of loans bought by Wall Street investors. CW9 also

 5   performed many reviews on loans Accredited was forced to repurchase because the Company

 6   had violated the representations and warranties it had made to the purchasers of the loans by

 7   accepting inflated appraisal values when it originated the loan.

 8          75.     According to CW9, Accredited allowed both corporate underwriters and sales

 9   managers to override the decisions of licensed property appraisers. In many cases, an appraisal

10   reviewer working for Accredited would reject a loan application after concluding that the

11   appraisal submitted with the application was inflated.        According to CW9, the Account

12   Executive who submitted the loan application would become annoyed by the rejection and

13   appeal the decision to a sales manager who then would overturn the appraisal reviewer’s decision

14   without any valid justification. According to CW9, overrides of appraisers’ decisions were

15   rampant: “As of June 2006, between 12% and 15% of our business was being done through

16   management overrides.”

17          76.     According to CW9, during the Class Period Accredited had a custom-built

18   appraisal review and tracking system that was developed by an outside vendor called ACI that

19   tracked all documentation with regard to appraisals – including management overrides of

20   appraisers’ decisions.

21          77.     Management override of appraisers’ decisions became a huge problem for the

22   Company when loans defaulted. According to CW9, when loans defaulted, the investors who

23   had purchased the loans performed an investigation and often found that the loan had been

24   originated based on an inflated appraisal, which gave the investors a legitimate reason to force

25   Accredited to buy back the defective loan. According to CW9, forced buybacks resulting from

26   inflated appraisals “started in 2005 and became a major issue halfway through 2006.”

27          78.     Notably, CW9 sent a report each month to defendant Jeffrey Crawford, Director

28   of Operations at Accredited, entitled: “Appraisal Review Production Report.” The Appraisal

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 1   Review Production Report included, among other things, summaries of all appraisal reviews

 2   including who performed the review, the outcome, and whether management had overridden
 3   the decision of the appraiser. According to CW9, the Company’s system tracked specifically
 4   any manager override activity on a national basis and the monthly Appraisal Review Production

 5   Report CW9 distributed to all managers showed how many overrides were performed within

 6   each division, and who performed them. The Appraisal Review Production Report, according to

 7   CW9, makes it impossible for Accredited’s upper-level management to claim they were unaware

 8   of issues with regard to the Company’s appraisal review process.

 9          79.     Confidential Witness 10 (“CW10”) corroborates the account of CW9. CW10 was

10   an Appraisal Reviewer for Accredited who worked at one of the Company’s regional offices in

11   Florida from July 2005 through June 2006. CW10’s job was to review property appraisals

12   submitted with each loan application, and reject those not within a 5% tolerance level of what

13   CW10 believed to be a fair valuation based upon, among other things, information from

14   Accredited’s database.    According to CW10, he was constantly under pressure to approve

15   appraisals CW10 did not believe to be fair, a practice that bothered CW10 so much CW10 left

16   the Company because of it: “There was a lot of pressure on us to give them the value that they

17   needed to do that loan, and that is why I left Accredited.”

18          80.     Similarly, prior to and throughout the Class Period, as detailed in Section II.E.,

19   defendants falsely and misleadingly stated that the Company’s underwriting policies penalized

20   employees who approved bad loans. According to defendants, the Company prevented poor

21   credit-quality loans from being originated by ensuring that “any loss on the loan is charged back

22   to the origination team.” In truth, the Company’s policies did not fully “charge back” such

23   losses from the origination of bad loans.

24          81.     According to CW1, managers on the sales side of Accredited’s business had

25   strong financial incentives to achieve high loan volumes. Operations Managers could receive a

26   monthly bonus of $10,000 or more based on origination volume. According to CW1, Operations

27   Managers’ bonuses were reduced only slightly when Accredited was forced to buy back loans

28   from investors because of underwriting defects or early-payment defaults. According to CW1,

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 1   the financial reward that sales managers could earn for originating loans (of any quality) was far

 2   greater than the penalties they faced for originating bad loans.

 3                          a.      Accredited Acquires Aames

 4          82.     In May 2005, Accredited announced it would acquire a smaller sub-prime lender,
 5   Aames. The deal was valued at $340 million, of which $109 million was paid in cash and the
 6   rest in Accredited stock exchanged for Aames’s stock at a ratio of 0.07 to 1. The transaction
 7   later closed on October 1, 2006. Because of defendants’ false and misleading representations,
 8   the investing public firmly believed that Accredited’s underwriting standards were superior to
 9   Aames’s underwriting standards. For example, the Joint Proxy Statement and Prospectus issued
10   by Accredited and Aames in connection with the acquisition stated that “Aames’s [historic]
11   higher delinquency rate is due to the lower credit quality of its typical borrower as compared to
12   Accredited’s.” Investors were further led to believe that Accredited’s acquisition of Aames
13   would succeed, in part, because Aames’s mortgage underwriters would be taught Accredited’s
14   disciplined and conservative underwriting procedures. In truth, according to former employees
15   of Aames who then went to work at Accredited, Accredited originated loans to persons with poor
16   credit-quality who were not qualified under the Company’s lending policies.
17          83.     Confidential Witness 11 (“CW11”) worked at Aames for five years prior to
18   joining Accredited in October 2006 as part of the acquisition. CW11 was the Western Retail
19   Operations Manager at Accredited from October 2006 until March 2007. CW11 was the top
20   credit manager for the Western Division of Accredited’s retail lending operations.         CW11
21   reported to H. James Fullen, Director of Retail Production at Accredited, who reported to
22   defendant Crawford. According to CW11, Accredited’s lending standards were much more
23   lenient than those at Aames. Aames was willing to make just one exception to its normal
24   underwriting guidelines for each loan. Accredited, by contrast, made multiple exceptions to its
25   lending guidelines on any given loan. According to CW11, “Accredited got very loosey goosey
26   on credit. It was common to see four, five or six exceptions on a loan. At Aames, you got one
27   exception and that was it. At Accredited, they actually pushed making the exceptions.”
28

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 1          84.     According to CW11, at Accredited there were about two dozen types of

 2   exceptions that could be made on a loan.            These included policy exceptions relating to:

 3   verification of employment, debt-to-income ratio, the interest rate on the loan, the margin on the

 4   loan, the two-year residence requirement, the two-year employment requirement, loan-to-value

 5   guidelines, property appraisal guidelines, and rules relating to the need for the borrower to pay

 6   off previously existing debts.

 7          85.     According to CW11, (1) there was a strong pressure to ramp up loan production at

 8   the end of each month, when each regional division was trying to reach its volume targets; (2)

 9   people on the sales side of Accredited would pressure the corporate underwriters to approve

10   loans that contained several exceptions; and (3) senior sales managers often overrode

11   underwriting decisions made by CW11 and his staff. According to CW11, “I was frequently

12   overridden on loans that I thought were pieces of crap. They wanted units and dollar volume and

13   didn’t care how they got there.”

14          86.     Confidential Witness 12 (“CW12”) was a Senior Underwriter at Accredited from

15   October 2006 through March 2007 in its Irvine office. CW12 reported to CW11, the Western

16   Retail Operations Manager. Prior to October 2006, CW12 had worked for Aames for five years.

17   CW12’s job was to review loan files and either approve or deny the loans based on the

18   borrower’s creditworthiness and the underwriting guidelines. While at Accredited, CW12 was

19   frequently pressured by senior managers to make exceptions to the Company’s standard

20   underwriting procedures. According to CW12, “At Accredited, we were told to make exceptions

21   on everything.” Exceptions could be made in many different categories, including FICO score,

22   loan-to-value, debt ratios, previous employment history and mortgage rating, among others.

23   CW12 witnessed loans being approved with as many as five exceptions.

24          87.     When CW12 denied loans, CW12’s underwriting decisions frequently were

25   overridden by managers on the sales side of Accredited’s operations.           However, CW12’s

26   comments on each loan were saved within a system that could be viewed by Accredited’s capital

27   markets division to help the capital markets unit determine what type of investor would be most

28

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 1   likely to buy the loan. The investors who bought Accredited’s loans were not able to see the

 2   underwriters’ comments.

 3          88.     Despite defendants’ statements throughout the Class Period that the Company was

 4   focused on credit quality and strict underwriting guidelines, according to CW12, it wasn’t until
 5   February 2007 that Accredited finally tightened its lending guidelines. According to CW12,
 6   “it was too late by then.”

 7                          b.    The Individual Defendants Closely
                                  Monitored Accredited’s Loan Originations
 8
            89.     Prior to and throughout the Class Period, defendants publicly assured investors
 9
     that they personally and closely monitored the Company’s origination of loans through a
10
     rigorous internal controls process. For instance, several of the Company’s SEC filings prior to
11
     and throughout the Class Period regularly included language similar or identical to this excerpt
12
     from a January 23, 2007 Prospectus describing defendants’ oversight of loan underwriting:
13
            Quality Control. Each month, Accredited’s internal audit and quality control
14          department generally reviews and re-underwrites a sample of the loans
            originated by Accredited. The statistical sample of loans is chosen by random
15          selection and based on the prior defect rates. In addition, targeted reviews are
            conducted, including but not limited to the following areas: regulatory
16          compliance, non-performing assets, targeted and discretionary reviews, or where
            fraud is suspected. The quality control department re-underwrites these loans
17          through an in-depth analysis of the following areas: application,
            income/employment, appraisals, credit decision, program criteria, net tangible
18          benefits, re-verifications, and compliance. Specifically, these tests focus on
            verifying proper completion of borrower disclosures and other loan
19          documentation, correct processing of all legally required documentation, and
            compliance with time frames imposed by applicable law. When fraud is
20          suspected, the quality control department undertakes a comprehensive re-
            underwriting of not only the loan in question, but any related loans connected by
21          broker, appraiser, or other parties to the transaction. All findings of the internal
            audit and quality control department are reported on a regular basis to
22          members of senior management and the audit committee of the board of
            directors. The Chief Executive Officer and the Chief Operating Officer, along
23          with the Director of Operations and others analyze the results of the monthly
            internal audit and quality control department audits as well as performance
24          trends and servicing issues. Based upon this analysis, corrective actions are
            taken.
25
            90.     Accredited’s Form 10-K for 2005 included a very similar disclosure of the
26
     Company’s internal controls, further clarifying that when the Quality Control department re-
27

28

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 1   underwrites these loans, it, among other things, “re-verifies the sources of income, re-verifies

 2   employment, and reviews the appraisals to ensure collateral values for the loans are supported.”

 3          91.     Accredited used sophisticated software that enabled the Company’s management,

 4   including defendants, to be able to monitor the Company’s deviations from underwriting

 5   procedures. Among other things, according to Accredited’s own Form 10-K filing with the SEC,

 6   the software provided a detailed analysis of each loan originated by the Company including “a

 7   comprehensive review of the total credit profile of the borrower and any exceptions made to our

 8   credit policies.” The Form 10-K continued: “We use software provided by ProClarity and

 9   Informatica to make this information readily available to management.”
10          92.     Defendants closely monitored the numbers and types of exceptions made to the

11   Company’s underwriting guidelines. According to Accredited’s Form 10-K filed with the SEC

12   on March 16, 2006: “To the extent that an individual loan application does not meet our

13   published underwriting guidelines, our loan origination teams and underwriters can make

14   underwriting exceptions. . . . Loan exceptions are tracked in our data warehouse and the

15   performance of loans with and without exceptions is monitored.” According to confidential

16   witnesses, defendants monitored these loan exceptions reports.

17          93.     Similarly, according to CW12, CW3 and CW5, Accredited’s San Diego

18   headquarters compiled a list of problem loans each month that contained data on loans that

19   investors had refused to buy (oftentimes referred to as the “bump list” or Problem Loan Report

20   or “PLR”). According to the Confidential Witnesses, the PLR or a summary was circulated to

21   senior management including defendants. The problem loans list showed: (i) the mortgage

22   broker who referred the problem loan to Accredited, (ii) the Accredited Account Executive who

23   handled that loan, (iii) the underwriter who worked with the Account Executive to assemble the

24   loan paperwork, (iv) the Corporate Underwriter who approved the loan, (v) whether the loan had

25   been approved on a “business decision” basis, meaning that it fell outside Accredited’s normal

26   underwriting guidelines, and (vi) if the loan had been approved using an override, it showed who

27   made the override.

28

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 1          94.     The problem loans list was also disseminated to the Company’s Operations

 2   Managers and Senior Credit Managers, including CW12’s superior. As a result of increasing

 3   problems with problem loans, according to CW12, low-level underwriters were encouraged to

 4   document all loans that had been approved through a management override so that the low-level

 5   underwriters could avoid blame if those loans soured. This information was also available to

 6   senior management, including defendants.

 7          95.     According to the Confidential Witnesses, the “bump list” was growing during the

 8   Class Period and was a clear indication to defendants of the Company’s declining underwriting

 9   standards.

10          96.     In the second half of 2006, as delinquencies and defaults increased, so did

11   investors’ scrutiny of Accredited’s loan portfolios being sold or securitized. Investors uncovered

12   that Accredited had been making loans in seeming disregard for individuals’ ability to pay.

13   Under this newly revamped investor scrutiny, defendants were forced to slash their earnings

14   projections going forward and ultimately buy back faulty and/or delinquent loans in massive

15   amounts. As a result, the Company was forced to the brink of bankruptcy and its stock price

16   collapsed.

17                  4.     Defendants’ Violations of Accounting Rules and Regulations

18          97.     Throughout the Class Period, the Company issued financial statements that were

19   materially misstated and not presented in accordance with GAAP. Defendants Konrath and

20   Buchanan also repeatedly signed sworn certifications regarding Accredited’s financial statements

21   and the adequacy of the Company’s internal controls, which were materially misleading as these

22   sworn certifications failed to reveal defendants’ knowledge of Accredited’s violations of GAAP.

23          98.     GAAP are those principles recognized by the accounting profession as

24   conventions, rules and procedures necessary to define accounting practices at a particular time.

25   The SEC has the statutory authority for the promulgation of GAAP for public companies and has

26   delegated that authority to the Financial Accounting Standards Board. SEC Regulation S-X (17

27   C.F.R. § 210.4-01(a)(1)) provides that financial statements filed with the SEC which are not

28

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 1   presented in accordance with GAAP will be presumed to be misleading, despite footnotes or

 2   other disclosures.

 3            99.    Accredited delayed publishing its audited financial results for year-end 2006 by

 4   4.5 months, filing its results with the SEC after the end of the Class Period on August 2, 2007.

 5   An audit, among other things, addresses management’s compliance with GAAP.                        The

 6   Company’s auditor during the Class Period, Grant Thornton, LLP, resigned from its position

 7   while performing the audit of the Company’s 2006 financial results and did not complete its

 8   audit.

 9                           a.      Defendants’ Manipulation Of Earnings By
                                     Inadequately Reserving For Defaults On
10                                   Mortgage Loans Held By The Company For Investment
11            100.   Through its REIT subsidiary, Accredited securitized non-prime mortgage loans
12   originated by AHL.       Generally, the REIT acquired mortgage assets and assumed funding
13   obligations from AHL, which were accounted for at AHL’s carrying value, as contributions from
14   AHL. According to the Company’s SEC filings:
15            These securitizations are structured legally as sales, but for accounting purposes
              are treated as financings under SFAS No. 140. These securitizations do not meet
16            the qualifying special purpose entity criteria under SFAS No. 140 and related
              interpretations because after the loans are securitized, the securitization trusts may
17            acquire derivatives relating to beneficial interests retained by Accredited and,
              Accredited, as servicer, subject to applicable contractual provisions, has
18            discretion, consistent with prudent mortgage servicing practices, to determine
              whether to sell or work out any loans securitized through the securitization trusts
19            that become troubled. Accordingly, the loans remain on the balance sheet as
              “loans held for investment”, retained interests are not created, and securitization
20            bond financing replaces the warehouse debt or asset backed commercial paper
              originally associated with the loans held for investment.
21
              101.   SFAS No. 140 requires that loans transferred to a third party that do not qualify
22
     for sale treatment for accounting purposes be reflected on the balance sheet as secured
23
     borrowings. Accredited refers to the loans it securitizes as mortgage loans held for investment
24
     (“MLIs”).
25
              102.   GAAP required Accredited to establish a reserve for potential credit losses on the
26
     MLIs when the underlying borrowers default on their obligation to make monthly mortgage
27
     payments. This reserve is an allowance for loan losses or “ALL”.
28

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 1          103.   The SEC provided explicit guidance on the proper accounting that Accredited

 2   should have followed, but did not. SEC Staff Accounting Bulletin: No. 102 – Selected Loan

 3   Loss Allowance Methodology and Documentation Issues, states in part:

 4          The staff normally would expect a registrant that engages in lending activities to
            develop and document a systematic methodology to determine its provision for
 5          loan losses and allowance for loan losses as of each financial reporting date. It is
            critical that loan loss allowance methodologies incorporate management's
 6          current judgments about the credit quality of the loan portfolio through a
            disciplined and consistently applied process. A registrant’s loan loss allowance
 7          methodology is influenced by entity-specific factors, such as an entity’s size,
            organizational structure, business environment and strategy, management style,
 8          loan portfolio characteristics, loan administration procedures, and management
            information systems. However, as indicated in the AICPA Audit and Accounting
 9          Guide, Banks and Savings Institutions (Audit Guide), “[w]hile different
            institutions may use different methods, there are certain common elements that
10          should be included in any [loan loss allowance] methodology for it to be
            effective.” A registrant’s loan loss allowance methodology generally should:
11
               •   Include a detailed analysis of the loan portfolio, performed on a regular
12                 basis;

13             •   Consider all loans (whether on an individual or group basis);
14             •   Identify loans to be evaluated for impairment on an individual basis under
                   SFAS No. 114 and segment the remainder of the portfolio into groups of
15                 loans with similar risk characteristics for evaluation and analysis under
                   SFAS No. 5;
16
               •   Consider all known relevant internal and external factors that may affect
17                 loan collectibility;

18             •   Be applied consistently but, when appropriate, be modified for new factors
                   affecting collectibility;
19
               •   Consider the particular risks inherent in different kinds of lending;
20
               •   Consider current collateral values (less costs to sell), where applicable;
21
               •   Require that analyses, estimates, reviews and other loan loss allowance
22                 methodology functions be performed by competent and well-trained
                   personnel;
23
               •   Be based on current and reliable data;
24
               •   Be well documented, in writing, with clear explanations of the supporting
25                 analyses and rationale . . .; and

26             •   Include a systematic and logical method to consolidate the loss estimates
                   and ensure the loan loss allowance balance is recorded in accordance with
27                 GAAP.

28          For many entities engaged in lending activities, the allowance and provision for
            loan losses are significant elements of the financial statements. Therefore, the
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 1          staff believes it is appropriate for an entity’s management to review, on a
            periodic basis, its methodology for determining its allowance for loan losses.
 2
            104.     Accredited did not establish an adequate ALL, violating GAAP and inflating
 3
     reported net income.
 4
            105.     According to Accredited’s SEC filings, the Company established the amount of
 5
     the ALL by segmenting the portfolio by contractual delinquency status and then applying
 6
     Accredited’s historical loss experience and other analytical tools to determine the reasonableness
 7
     of the reserve. Loss estimates were purportedly reviewed periodically and any adjustments were
 8
     purportedly reported in earnings.
 9
            106.     Defendants violated GAAP by manipulating and artificially increasing the
10
     Company’s reported earnings by not recording sufficient or reasonable ALL in light of the fact
11
     the Company substantially deviated from its underwriting guidelines in 2005 and 2006 and
12
     provided loans to persons with inferior credit quality that could be expected to default, as set
13
     forth in Section II.D.3.
14
            107.     Because the defendants caused the Company’s employees to deviate from the
15
     Company’s underwriting guidelines when originating loans, the defendants should have
16
     substantially increased the Company’s ALL during the Class Period. The Company did not do
17
     so but, rather, the ALL actually decreased as a percentage of the Company’s delinquent loans.
18
            108.     The table below indicates that beginning with the Company’s reported financial
19
     results for the third quarter of 2005, in every quarter, the Company drastically reduced the
20
     amount of its ALL in proportion to the amount of delinquencies the Company was then
21
     experiencing.    While the amount of MLI was increasing in the Class Period, and the
22
     delinquencies were increasing dramatically every quarter, the Company was dramatically
23
     reducing the proportion of its ALL relative to the amount of delinquencies:
24

25

26

27

28

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 1                   Mortgage         Allowance              MLI 90+       % of MLI       ALL as a %
                   Loans Held for      for Loan             Delinquent        90+           of 90+
 2                  Investment          Losses              ($ millions)   Delinquent     Delinquent
                    ($ millions)      ($ millions)
 3
      4Q’06           8,694.0           138.25                 316.3         3.64%           43.72%
 4    3Q’06           7,396.8            124.2                 136.8         1.85%           90.74%
      2Q’06           7,809.5            125.4                 96.6          1.24%          129.74%
 5    1Q’06           7,763.2            115.7                 85.5          1.10%          135.36%
      4Q’05           7,321.6            106.0                 71.3          0.97%          148.56%
 6
      3Q’05           5,874.9            95.7                  49.1          0.84%          195.04%
 7    2Q’05           5,214.5            84.2                  36.3          0.70%          231.98%
      1Q’05           4,667.6            69.3                  29.7          0.64%          233.54%
 8    4Q’04            4,102             60.1                  22.6          0.55%          265.70%
      3Q’04            4,084             51.3                  18.5          0.45%          277.45%
 9
      2Q’04            3,303             40.8                  12.9          0.39%          316.34%
10    1Q’04           2,142.3            24.7                   8.7          0.41%          283.75%

11          109.     As the amount of 90+ days delinquent loans increased during the period (from

12   $8.7 million in 1Q’04 to $136.8 million in 3Q’06 to $316.3 million in 4Q’06), the percentage of

13   the allowance for mortgage loans related to delinquent loans decreased dramatically (from

14   283.75% in 1Q’04 to 90.74% in 3Q’06 to 43.72% in 4Q’06). The defendants manipulated and

15   artificially inflated the Company’s reported income by not taking adequate ALL reserves.

16          110.     In each of the six quarters prior to the Class Period, the Company maintained its

17   ALL reserve at no less than 232% of the Company’s MLI 90+ Days Delinquent. During the

18   Class Period, the defendants did not. Because defendants caused the Company to abandon its

19   underwriting guidelines, the ALL reserve should have been increased to more than 232% of the

20   Company’s MLI 90+ Days Delinquent during the Class Period. Even assuming the proper ALL

21   level as a percentage of delinquencies during the Class Period was the historic low of 232% in

22   2Q05 (it should have been higher because the Company deviated from its underwriting standards

23   during the Class Period), the amount of the ALL understatement – and corresponding

24   manipulation of publicly reported income – is set forth in the table below (all numbers in $

25   millions):

26

27

28

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 1                   ALL          Proper ALL               ALL         Cumulative          Quarterly
                    Reserve     Reserve at 232%           Reserve      Inflation of       Inflation of
 2                  Actual       MLI 90+ Day             Deficiency     Reported           Reported
                                 Delinquencies                           Income             Income
 3
           4Q’06     138.25           733.7               595.455        595.455            402.161
 4         3Q’06      124.2          317.47               193.293        193.293             94.471
           2Q’06      125.4         224.212                 98.8           98.8              16.22
 5         1Q’06      115.7           198.3                 82.6           82.6               23.06
           4Q’05      106.0          165.56                59.54          59.54               41.40
 6
           3Q’05       95.7          113.87                18.14          18.14               18.14
 7
            111.    As indicated by the above table, the Company understated the ALL by tens of
 8
     millions of dollars in each quarter and hundreds of millions of dollars by the end of the Class
 9
     Period. The understating of the ALL had a dollar-for-dollar impact on the Company’s reported
10
     pre-tax income during the Class Period. (The effect on net income would be reduced by the
11
     Company’s effective tax rate.) Thus, the Company reported misleading income numbers during
12
     each quarter of the Class Period in violation of GAAP.
13
                           b.      Defendants’ Manipulation Of Earnings By
14                                 Inadequately Reserving For Real Estate Owned

15          112.    “REO” is real estate the Company owns as a result of a borrower’s default and a

16   subsequent foreclosure by the Company. Throughout the Class Period, the Company’s gross real

17   estate owned grew dramatically. Despite the fact the Company’s gross REO was growing

18   dramatically during the Class Period, defendants manipulated the Company’s reported earnings

19   by not increasing the Company’s REO reserve proportionately.

20          113.    During the Class Period, Accredited sold mortgage loans to third parties. Gains

21   or losses resulting from loan sales were purportedly recognized at the time of sale, based

22   primarily on the difference between the net sales proceeds and the book value of the loans sold.

23          114.    Accredited provided purchasers of its mortgage loans with representations and

24   warranties regarding the underwriting standards the Company followed in originating the loans.

25   If a purchaser of the mortgage loans determined that Accredited violated its representations and

26   warranties OR a borrower defaulted during the early months of the loan, the purchaser could

27   require Accredited to repurchase the mortgage loan.

28

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                                                  -32-                    CLASS ACTION COMPLAINT
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 1            115.    As a part of the Company’s business, it regularly was required to buy back loans

 2   from purchasers of the Company’s loan portfolio. Generally speaking, the Company normally

 3   tried to resell repurchased loans in the “scratch and dent” market. Sales in this market were

 4   normally at a loss because repurchased loans are, by their very nature, considered defective and

 5   therefore less valuable. If, however, the Company could not resell its repurchased loans in the

 6   “scratch and dent” market and the loan defaulted, the Company would foreclose on the loan and

 7   the property serving as collateral for the loan would become part of REO.

 8            116.    The following table demonstrates that in the reporting periods prior to the Class

 9   Period, the Company maintained an REO reserve in excess of 40% of its gross REO. As the

10   gross REO grew, the Company historically increased the REO reserve. However, beginning

11   with the Company’s year-end 2005 financial results, defendants caused the REO reserve to be

12   increased by disproportionately less, clearly understating the Company’s second, third and fourth

13   quarter financial results for 2006 (4Q’06 numbers in the table are from the Company’s February

14   14, 2007 press release). The REO reserve deficiency is the amount the reported reserve would

15   need to be increased to match the Company’s historic 40% REO reserve as a percent of gross

16   REO.

17                   Gross REO         REO          Net REO       REO Reserve as a      REO Reserve
                     ($ millions)     Reserve      ($ millions)   % of Gross REO          Deficiency
18                                  ($ millions)                                         ($ millions)
19       4Q’04          10.53           4.41           6.12             41.85%
         1Q’05          14.90           6.40           8.50             42.95%
20       2Q’05          16.90           7.01           9.89             41.48%
         3Q’05          18.51           7.96           10.55            43.00%
21       4Q’05          26.81          10.73           16.09            40.00%
         1Q’06          34.26          13.70           20.56            39.99%
22
         2Q’06          52.62          12.78           39.84            24.29%               8.27
23       3Q’06          69.76          17.30           52.46            24.80%               10.61
         4Q’06          116 3         27.275 4        88.725            23.5%               19.125
24
              117.    As indicated in the table, defendants caused the Company to understate the REO
25
     reserve in, at least, the June 30, 2006, September 30, 2006 and December 31, 2006 reporting
26

27
     3   Excludes Aames REO for consistency, as the Company did in its 4Q’06 press release.
28   4   Excludes Aames REO reserve for consistency, as the Company did in its 4Q’06 press release.
                                                                          CORRECTED CONSOLIDATED
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 1   periods. The understating of the Company’s REO reserve violated GAAP and overstated net

 2   increases.

 3          118.    By maintaining the REO reserve at only 24% of Accredited’s gross REO – rather

 4   than 40% of the gross REO as was the case in historic reporting periods – defendants falsely and

 5   misleadingly understated REO reserve by $8.27 million in the second quarter of 2006, $10.61

 6   million in the third quarter of 2006 and $19.125 in the fourth quarter of 2006.

 7          119.    As a result of defendants’ manipulation of the Company’s REO reserve, the

 8   defendants falsely and misleadingly inflated the Company’s reported pre-tax income by $8.27

 9   million in the second quarter of 2006. (The effect on net income would be reduced by the

10   Company’s effective tax rate, approximately 39% in 2Q’06, to about $5 million.)                The

11   Company’s reported net income for the period was $41.25 million.                  Thus, defendants’
12   manipulation of the REO reserve constituted over 12% of the Company’s reported net income
13   in the second quarter of 2006.
14          120.    Manipulation of the REO reserve in the second quarter of 2006 masked a negative

15   earnings trend developing in 2006. Throughout 2005, Accredited’s reported net income had

16   been steadily rising each quarter from $31.29 million to $43.31 million. As of March 31, 2006,

17   Accredited’s net income for the quarter was $35.82 million, a decline that defendants attributed

18   to the annual dip in earnings generally experienced in the mortgage banking industry in the first

19   quarter of each year due to the year-end rush to close loans. At that point in time, Accredited’s

20   decrease in earnings did not appear to be unusual in nature. However, had defendants not

21   manipulated the Company’s REO reserve in the second quarter, Accredited’s net income would

22   have been below year-end 2005 levels. But for manipulating the percentage of REO reserves

23   from the historic 40% level to just under 25%, net income would have been nearly flat from the

24   first quarter 2006 results (reported net income for 1Q’06 was $35.82 million and net income but

25   for the manipulation of the REO reserve for 2Q’06 would have been $36.23 million). By

26   reducing the percentage of the REO reserves, defendants were able to artificially inflate reported

27   net income to $41.25 million and show a substantial increase over the prior quarter.            By

28

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 1   manipulating the REO reserve, defendants maintained the illusion that Accredited was growing

 2   its earnings.

 3           121.    As a result of defendants’ manipulation of the Company’s REO reserve, the

 4   defendants inflated the Company’s reported pre-tax income by $10.61 million in the third quarter

 5   of 2006 (which includes the $8.27 million of the prior quarter and is therefore cumulative). Not

 6   including the $8.27 million from the prior quarter, the pre-tax income was inflated by $2.34

 7   million in 3Q’06. (The effect on net income would be reduced by the Company’s effective tax

 8   rate, approximately 19.85% in 3Q’06, to about $1.876 million.) The Company’s reported net

 9   income for the period was only $18.43 million. Defendants’ manipulation of the REO reserve
10   constituted at least 10.2% of the Company’s reported net income in the third quarter of 2006.
11           122.    As a result of defendants’ manipulation of the Company’s REO reserve, the

12   defendants falsely and misleadingly inflated the Company’s reported pre-tax income by $19.13

13   million in the fourth quarter of 2006 (which includes the $10.61 million of the prior quarters and

14   is therefore cumulative). Not including the $10.61 million from the prior quarters, the pre-tax

15   income was inflated by $8.52 million in 4Q’06.

16           123.    After the Class Period, on August 2, 2007, the Company belatedly filed its Form

17   10-K for 2006 containing its audited financial statements for the full-year 2006.          In the

18   Company’s audited financial results for 2006, the Company increased its REO reserve to $40.36

19   million from $27.275 million as had been previously reported. The Company’s 2006 Form 10-K

20   admits the Company’s previous disclosure concerning the Company’s 2006 year-end financial

21   results – the unaudited disclosure made during the Class Period on February 14, 2007 – was false

22   and misleading because the Company’s REO reserve was understated by $13.1 million (the

23   difference between $40.36 million and $27.275 million). The Company has, therefore, admitted

24   that during the Class Period it overstated its 4Q’06 income by $13.1 million.

25                          c.     Defendants’ Manipulation Of Earnings By
                                   Inadequately Reserving For Repurchase Losses
26                                 On Mortgage Loans Sold To Third Party Investors
27           124.    During the Class Period, the defendants caused Accredited to report materially
28   and artificially inflated earnings by knowingly or recklessly under-reserving for the Company’s
                                                                         CORRECTED CONSOLIDATED
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 1   growing obligations to buy back loans from purchasers of the Company’s loan portfolio and

 2   losses resulting from resale of those loans at decreased values.

 3          125.    During the Class Period, Accredited sold mortgage loans to third parties. Gains

 4   or losses resulting from loan sales were purportedly recognized at the time of sale, based

 5   primarily on the difference between the net sales proceeds and the book value of the loans sold.

 6          126.    Accredited provided purchasers of its mortgage loans with representations and

 7   warranties regarding the underwriting standards the Company followed in originating the loans.

 8   If a purchaser of the mortgage loans determined that Accredited violated its representations and

 9   warranties OR a borrower defaulted during the early months of the loan, the purchaser could

10   require Accredited to repurchase the mortgage loan.

11          127.    If Accredited was required to repurchase a loan, either because the borrower had

12   defaulted on the loan or because it had been originated in violation of the underwriting

13   representations and warranties, the loan lost value. Accredited could not resell that loan at its

14   original value but could only do so at a substantial discount. The reserve is expected to cover the

15   difference between the repurchase price and the resale value.

16          128.    As a result, GAAP (including SFAS No. 5, SFAS No. 140 and EITF 92-2)

17   required that Accredited maintain a reserve on its balance sheet to cover future losses and

18   expenses that were expected to arise as a result of repurchase obligations.

19          129.    In accordance with SFAS No. 140, Accounting for Transfers and Servicing of

20   Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125, and

21   EITF 92-2, Measuring Loss Accruals by Transferors for Transfers of Receivables with Recourse,

22   the reserve is estimated based on factors including the Company’s historical repurchase

23   experience, industry repurchase experience, expected future volume of repurchases, and

24   expected value of underlying collateral.

25          130.    SFAS No. 140 and EITF 92-2 require the reserve to be estimated and recorded as

26   a liability on Accredited’s balance sheet in the period in which the loans are sold, with a

27   corresponding reduction of Accredited’s gain on whole loan sales in its income statement. Any

28

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 1   subsequent increases/decreases to the reserve are also required to be recorded as a current

 2   reduction of/addition to Accredited’s gain on whole loan sales.

 3          131.    Defendants caused Accredited to violate GAAP by not maintaining an adequate

 4   reserve on its balance sheet for losses resulting from expected repurchase obligations.

 5          132.    As set forth herein at Section II.D.3., the Company substantially deviated from the

 6   underwriting guidelines in 2005 and 2006 that had been represented to buyers of the Company’s

 7   loans. The Company provided a great many loans to persons with inferior credit quality that

 8   could be expected to default, thereby causing the Company to have an increasing amount of

 9   repurchase obligations. The defendants should have substantially increased the Company’s

10   reserves for repurchases during the Class Period.

11          133.    The inadequacy of the Company’s reserve for repurchases is evident in several

12   respects. The table below illustrates the fact that the Company’s reserve for repurchases was

13   insufficient at least as early as 2Q’06. (Note: Information for the fourth quarter of 2006 is from

14   the Company’s press release and analyst conference call during the Class Period on February 14,

15   2007, which differs from the Company’s audited financial results included in the Form 10-K

16   filed with the SEC after the Class Period on August 2, 2007.) 5
17                                    Loans                Reserve for          Implied Discount
                                   Repurchased             Repurchases
18             3Q’05                   21.3                    6.8                   31.92%
19             4Q’05                   18.1                    7.4                   40.88%
               1Q’06                   14.6                    8.0                   54.79%
20             2Q ‘06                  38.6                    8.7                   22.54%
               3Q’06                   61.8                   17.3                   27.99%
21             4Q’06                   90.0                   26.8                   29.78%
22

23

24   5   When the Company released its full-year 2006 and 4Q’06 financial results during the Class
     Period on February 14, 2007, the Repurchases Reserve was listed as $26.797 million. Defendant
25   Buchanan stated during the Company’s conference call: “The Repurchases Reserve is $27
     million.” However, in the Company’s audited financial results contained in the Form 10-K filed
26
     with the SEC on August 2, 2007 – after the Class Period – the Repurchases Reserve is $43.881
27   million. As is detailed further at ¶138, the difference between the size of the Company’s reserve
     disclosed in the unaudited versus the audited financial results is an admission that the Company
28   did not adequately reserve for losses during the Class Period and, therefore, artificially inflated
     its reported income.
                                                                          CORRECTED CONSOLIDATED
                                                  -37-                     CLASS ACTION COMPLAINT
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 1           134.   By 2006, the Company was being forced to buy back a growing number of the

 2   loans it sold throughout 2005-2006, but the Company did not increase its reserves in step. This

 3   was unreasonable and in violation of GAAP and, as a result of not taking sufficient reserves,

 4   defendants manipulated and artificially inflated the Company’s reported income in each quarter.

 5           135.   The Company should have been reserving for the increase in loan repurchases as

 6   soon as it started routinely deviating from its underwriting guidelines.         The table below

 7   illustrates the rapid rate of growth of repurchases as contrasted by the lagging rate of growth of

 8   Repurchases Reserve throughout 2006. While the Repurchases Reserve is established at the time

 9   of the initial third-party sale, adjustments to those reserves should be made when repurchase data

10   no longer supports the original estimates for the reserves. It is clear from the table below that

11   Accredited not only failed to adjust reserves for repurchases in step with the requests for

12   repurchases (Accredited’s reserve increases lag the growth in repurchases by one quarter), but it

13   also failed to adjust them by the same order of magnitude. Requests for repurchases were

14   increasing far faster than the Company’s reserves for repurchases of mortgage loans. As a result

15   of not recording sufficient reserves, defendants violated GAAP and artificially inflated the

16   Company’s reported income in each quarter.

17             Loans Repurchased          Rate of               Reserve for           Rate of Growth
                  ($ Millions)           Growth of              Repurchases             of Reserve
18                                      Repurchases             ($ Millions)
19   1Q’06              14.6                                         8.0
     2Q’06              38.6               164.38%                   8.7                    8.75%
20   3Q’06              61.8               60.10%                   17.3                    98.5%
     4Q’06               90                45.63%                   26.8                   54.91%
21
             136.   Generally speaking, Accredited normally tried to resell repurchased loans in the
22
     “scratch and dent” market. Sales in this market were normally at a loss since repurchased loans
23
     are, by their very nature, considered defective and therefore less valuable. Defendants did not
24
     increase the Company’s Repurchases Reserve to reflect that the valuations for loans sold in the
25
     “scratch and dent” market were declining as the number of defective loans increased and
26
     purchasers were not willing to pay as much as before. Instead of increasing reserves to reflect
27
     this relationship, Accredited actually did just the opposite, thereby creating a reserve deficiency
28

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 1   starting no later than 2Q’06. (The amount of the reserve deficiency assumes the Company

 2   should have maintained an implied discount of 48.75%, which number is taken from the

 3   Company’s Form 10-K filed with the SEC after the Class Period as explained further at ¶138.

 4   All numbers in millions of dollars, except where marked %.)

 5                    Loans          Reserve for         Implied     Reserve          Reserve
                   Repurchased       Repurchase          Discount   Deficiency    Deficiency Non-
 6                                                                                 Cumulative
       4Q’05            18.1                7.4          40.88%
 7     1Q’06            14.6                8.0          54.79%
       2Q’06            38.6                8.7          22.54%        10.12            10.12
 8     3Q’06            61.8               17.3          27.99%       12.8275            2.71
       4Q’06             90                26.8          29.78%       17.075            4.25
 9
            137.   Thus, during the Class Period, defendants did not sufficiently record adequate
10
     reserves for repurchases to keep pace with growing repurchase amounts and the depressed
11
     market in which Accredited tried to resell the repurchased loans. Defendants did not record the
12
     Repurchases Reserve sufficiently because doing so would have directly and materially impacted
13
     the Company’s reported earnings by reducing the reported earnings on a dollar-for-dollar basis.
14
     As a result of not properly recording the Company’s reserve for repurchases, the Company’s
15
     financial statements violated GAAP.
16
            138.   After the Class Period, on August 2, 2007, the Company filed its Form 10-K for
17
     2006 containing its audited financial statements for the full-year 2006. In the Company’s
18
     audited financial results for 2006, the Company’s reserve for repurchases (excluding Aames)
19
     was increased to $43.881 million from the $26.8 million reported during the Class Period. The
20
     implied discount for repurchased loans was increased to 48.75% from 29.78%. The Company’s
21
     2006 Form 10-K thereby admits the Company’s previous disclosure concerning the Company’s
22
     2006 year-end financial results – the unaudited disclosure made during the Class Period on
23
     February 14, 2007 – was understated by $17.1 million (the difference between $43.881 million
24
     and $26.8 million).   The Company has therefore admitted that during the Class Period it
25
     overstated its 4Q’06 income by $17.1 million.
26

27

28

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                                                  -39-                  CLASS ACTION COMPLAINT
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 1                          d.      Net Effect of Defendants’ Manipulation Of Reserves

 2          139.     As a result of defendants’ manipulation of the Company’s reserves, Accredited
 3   reported artificially inflated net income in each quarter during the Class Period. The following
 4   table shows the net effect, by quarter, of defendants’ manipulation of reserves on the Company’s
 5   publicly reported net income. All numbers are in millions of dollars, except the Company’s
 6   effective tax rate. The manipulation of the Company’s reserves is shown on a non-cumulative
 7   basis for each quarter (i.e., the understatement in a particular quarter is not included in
 8   subsequent quarters.) Moreover, as set forth above, the reserve manipulation numbers in the
 9   table are based on deviations from Accredited’s historic reserves in periods prior to the Class
10   Period. In truth, because defendants had caused the Company to deviate from its underwriting
11   policies during the Class Period, Accredited should have increased its reserves during the Class
12   Period to take into account the lower credit-quality of its portfolio. Thus, the table sets forth a
13   conservative analysis of the overstatement of the Company’s net income manipulation.
14

15     Reporting Period          3Q’05      4Q’05          1Q’06     2Q’06        3Q’06        4Q’06
          Net Income             41.29      43.31          35.82     41.25        18.43       (37.83)
16         Reported
      ALL Manipulation           18.14      41.40          23.06     16.22        94.47       402.16
17
        REO Reserve                                                   8.27         2.34        8.52
18      Manipulation
         Repurchases                                                 10.12         2.71        4.25
19          Reserve
        Manipulation
20    Total Manipulation         18.14      41.40          23.06     34.61        99.52       414.93
21         (Pre-Tax)
      Effective Tax Rate         40.25%     38.15          39.21     39.31        19.85        33.01
22        After-Tax               10.84     25.27          14.07     21.01        79.77       277.98
      Adjustment to Net
23          Income
         Adjusted Net            30.45      17.70          21.80     20.24        (61.34)    (315.81)
24
            Income
25
            140.     During the Class Period, defendants overstated the Company’s pre-tax income by
26
     $631.66 million by understating reserves (i.e., the sum of the quarterly Total Manipulation (Pre-
27
     Tax), above).
28

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 1                         e.      Defendants’ Manipulation Of Earnings
                                   And Its Balance Sheet By Not Properly
 2                                 Accounting For The Aames Acquisition

 3          141.    The Company’s Form 10-K filed with the SEC on August 2, 2007, after the Class

 4   Period, admits the Company 4Q’06 earnings press release dated February 14, 2007, inflated the

 5   Company’s reported earnings for the Fourth Quarter of 2006 by $142.4 million, and reported

 6   inflated assets on its balance sheet for the same period in an amount equal to $63 million, by

 7   improperly accounting for the Company’s acquisition of Aames in violation of GAAP and then

 8   not recording an impairment of assets in accordance with GAAP.

 9          142.    Accredited agreed to acquire Aames on May 24, 2006.            This merger was

10   subsequently consummated on October 1, 2006. Accredited paid Aames shareholders $77.6

11   million cash and 4.4 million shares of Accredited’s stock. On the date the Aames acquisition

12   was announced, Accredited’s stock closed at $51.94 per share. The deal was therefore valued at

13   approximately $329.5 million, of which $235.528 million was in stock.

14          143.    Under SFAS No. 142, Goodwill and Other Intangible Assets, Accredited was

15   required to record goodwill on its balance sheet in connection with the Aames acquisition. The

16   GAAP requirement is very clear that the amount of goodwill is determined based on the

17   valuation of the deal on the date the transaction is announced.

18          144.    The requirement for recording acquisitions is made perfectly clear in EITF 99-12:

19   Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a

20   Purchase Business Combination, which states:

21          [T]he value of the acquirer’s marketable equity securities issued to effect a
            purchase business combination should be determined, pursuant to the guidance in
22          paragraph 74 of Opinion 16, based on the market price of the securities over a
            reasonable period of time before and after the terms of the acquisition are agreed
23          to and announced. In other words, the date of measurement of the value of the
            acquirer’s marketable equity securities should not be influenced by the need to
24          obtain shareholder or regulatory approvals. Task Force members observed that
            the reasonable period of time referred to in paragraph 74 of Opinion 16 is
25          intended to be very short, such as a few days before and after the acquisition is
            agreed to and announced.
26
            145.    Thus, Accredited should have recorded goodwill based on the valuation of the
27
     deal as determined on or within “a few days before and after the acquisition [was] agreed to and
28
     announced” on May 24, 2006 (date of agreement) or May 25, 2006 (date announced). When,
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 1   however, Accredited consummated its acquisition of Aames on October 1, 2006, Accredited

 2   recorded approximately $63 million of goodwill in connection with this transaction, using the

 3   stock price of October 1, 2006 (which was $19 less than the stock price on the date the deal was

 4   announced, the proper date for valuing the deal under GAAP). There was no basis for using the

 5   October 1, 2006 consummation date. The Company should have used the May 24 value and

 6   recorded $142.4 million in goodwill, but did not do so during the Class Period in violation of

 7   GAAP.

 8           146.   In a press release dated March 20, 2007, Accredited admitted that it improperly

 9   calculated the purchase price and corresponding goodwill recorded in connection with its

10   acquisition of Aames. Specifically, Accredited admits it calculated the purchase price based on

11   the closing price of its stock on the date the acquisition was consummated.

12           147.   GAAP is unequivocal that the appropriate date for valuing an acquisition is at the

13   time, or shortly before or after, the agreement is announced. Defendants’ decision to use the date

14   the deal closed was an attempt to avoid recognizing the entire $142.4 million of goodwill and to

15   avoid taking a huge write-down that would have shown up as a $142.4 million loss on the

16   Company’s earnings for the fourth quarter of 2006.

17           148.   Had the Company properly recorded the $142.4 million in goodwill as required

18   by GAAP, the Company would have also been required to write-down that goodwill to zero in

19   the fourth quarter of 2006. The Company has admitted in SEC filings and a press release that the

20   entire balance of the goodwill from the Aames acquisition was impaired and should have been

21   written-down to zero during the fourth quarter of 2006. Had the Company properly recorded the

22   $142.4 million in goodwill as required by GAAP, the result of this write-down would be to

23   decrease Accredited’s assets and earnings by $142.4 million as of December 31, 2006.

24           149.   As a result of this accounting violation, as defendants have admitted, the

25   Company was not able to timely file its Form 10-K with the SEC, causing it to be in violation of

26   covenants in its lending agreements and causing the Company to be at substantial risk of being

27   de-listed from the NYSE and NASDAQ markets.

28

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 1            150.   When the Company filed its Form 10-K with the SEC after the Class Period, the

 2   Company corrected its previously incorrect accounting for the acquisition. In doing so, the

 3   Company admitted its reported financial results for 2006 were false and misleading at the time

 4   they were published.

 5                   5.     The REIT’s And Accredited’s Collapse And Near Bankruptcy
                            Resulting From Defendants’ Concealment Of The Company’s True
 6                          Financial Condition And Its Undisclosed Contingent Liabilities

 7            151.   Throughout the Class Period, defendants concealed Accredited’s true financial

 8   condition and, by doing so, artificially inflated the price of Accredited securities at all relevant

 9   times.

10            152.   Among other things, defendants concealed factors concerning the material risk

11   that a liquidity crisis and/or bankruptcy could result from the increase in the volume of loans that

12   the Company originated in violation of underwriting policies and extending credit to borrowers

13   with poor-credit quality.    By not properly stating the Company’s reserves for bad loans,

14   defendants further concealed the Company’s true creditworthiness and defendants’ scheme to

15   inflate lending volume.

16            153.   Near the end of the Class Period, the Company would suffer a crippling liquidity

17   crisis as the Company was forced to make increasing amounts of repurchases of bad loans and

18   the Company was forced to put up cash as collateral in response to margin calls under the

19   Company’s credit facilities, as explained below.

20            154.   The Company’s credit facilities were of critical importance to its operations and

21   liquidity during the Class Period. During the Class Period, Accredited would typically finance

22   mortgage loans initially through one of nine different secured warehouse credit facilities or

23   through an asset backed commercial paper facility. The Company would then repay the related

24   borrowings under these credit facilities upon sale or securitization of the loans. According to the

25   Company’s Form 10-K, these facilities provided the Company with approximately $5.2 billion of

26   credit capacity.

27            155.   The Company’s Form 10-K also included the following disclosure concerning the

28   covenants in the Company’s credit facilities:

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 1            Our credit facilities contain covenants that restrict our operations and may inhibit
              our ability to grow our business and increase revenues.
 2
              Our credit facilities contain extensive restrictions and covenants that, among other
 3            things, require us to satisfy specified financial, asset quality and loan
              performance tests and may prohibit inter-company dividends in certain
 4            circumstances. If we fail to meet or satisfy any of these covenants, we would be
              in default under these agreements and our lenders could elect to declare all
 5            amounts outstanding under the agreements to be immediately due and payable,
              enforce their interests against collateral pledged under such agreements and
 6            restrict our ability to make additional borrowings. These agreements also contain
              cross-default provisions, so that if a default occurs under any one agreement, the
 7            lenders under our other agreements could also declare a default.

 8            The covenants and restrictions in our credit facilities may restrict our ability to,
              among other things:
 9
                 •   incur additional debt;
10               •   make certain investments or acquisitions;
                 •   repurchase or redeem capital stock;
11               •   engage in mergers or consolidations;
                 •   finance loans with certain attributes;
12               •   reduce liquidity below certain levels; and
                 •   hold loans for longer than established time periods.
13
              These restrictions may interfere with our ability to obtain financing or to engage
14            in other business activities, which may significantly harm our business, financial
              condition, liquidity and results of operations.
15
              156.   One of the “financial” restrictions posed by the credit facility covenants was that
16
     the Company had to be profitable, meaning it had to report positive net income.
17
              157.   One of the reasons the Company’s credit facilities required the Company to
18
     comply with certain loan portfolio tests was that the credit facilities were collateralized by
19
     “substantially all mortgage loans held for sale” by the Company. Thus, it was critical to the
20
     entities extending the credit facilities to the Company that the Company abide by the Company’s
21
     underwriting procedures and only extend loans to borrowers willing and able to pay back those
22
     loans.
23
              158.   During the Class Period, however, defendants repeatedly violated the covenants
24
     set forth in the credit facilities and caused the Company to enter into loans that would cause the
25
     Company’s portfolio to violate the credit facility covenants. Rather than disclose this truth, the
26
     defendants repeatedly reassured investors the Company had excellent liquidity, was well-
27
     prepared to handle any liquidity issues in the market, and that the Company was in compliance
28
     with all covenants. Indeed, the Company’s Form 10-K falsely stated: “At December 31, 2005,
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 1   Accredited was in compliance with all covenant requirements for each of the facilities.”

 2   Similarly, each of the Company’s Form 10-Qs published during 2006 included a disclosure

 3   similar to the Company’s Form 10-Q for the third quarter, which was published on November 9,

 4   2006 and falsely stated: “At September 30, 2006, Accredited was in compliance with all

 5   covenant requirements for each of the facilities.”

 6          159.    As the Company set forth in its Form 10-K for 2005, the covenants restricted the

 7   Company’s ability to “finance loans with certain attributes.”          However, the Company was

 8   financing loans with risky attributes because defendants violated the Company’s own

 9   underwriting policies when extending loans to risky borrowers in an effort to artificially inflate

10   the Company’s reported loan volumes and revenues.                The Company’s loan portfolio was

11   therefore materially weaker than the Company disclosed.

12          160.    As is detailed further in Section II.F, Lone Star terminated its contemplated

13   acquisition of Accredited because the Company committed “violations of covenants in the

14   Company’s core credit facilities” having a material adverse effect to the Company and, along

15   with other factors specific to the Company, causing the Company’s “current financial condition

16   and liquidity crisis.” Moreover, defendants continue to conceal facts concerning the Company’s

17   compliance with covenants in the Company’s credit facilities: “Accredited has not provided

18   Lone Star with requested information regarding Accredited’s current financial condition and

19   prospects, including information regarding Accredited’s compliance with the terms and

20   conditions of its credit facilities and communications between or among Accredited and its

21   creditors regarding the covenants in those credit facilities.”

22          161.    The Company’s credit facilities also contained covenants requiring the Company

23   to be profitable in any given quarter. No later than 3Q’06, the Company was in violation of the

24   covenant requiring that the Company be profitable. Accredited falsely appeared to be profitable

25   through defendants’ manipulating of the Company’s reserves, as detailed herein at Section

26   II.D.4.d. Therefore, the Company was not in compliance with the financial covenants in the

27   Company’s credit facilities.

28

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 1             162.    The table below further demonstrates the value of the Company’s loan portfolio,

 2   which served as collateral for its credit facilities, was in steady decline throughout the Class

 3   Period and therefore, as defendants knew, the Company faced an increasing risk of potentially

 4   debilitating margin calls in connection with the Company’s credit facilities. As indicated in the

 5   table, the amount of mortgage loans held for sale (“MLS”) that were delinquent was growing

 6   steadily. And, the amount of loans repurchased was growing steadily throughout 2006. And,

 7   throughout the Class Period the Company was increasingly taking possession of real estate that

 8   had been collateral for loans where the borrower defaulted – which real estate the Company

 9   could not sell – as established by the increase in gross REO. (All numbers in $ millions, except

10   where marked %.)

11                    MLS        MLS 90+        % of MLS       Reserve for    Loans              Gross
                                   Days          90+ Days      Repurchases Repurchased           REO
12                              Delinquent      Delinquent
13   3Q’05        2,370.8          18.1           0.77%              6.8               21.3      18.51
     4Q’05        2,267.6          20.9           0.92%              7.4               18.1      26.81
14   1Q’06        1,724.8           31            1.80%              8.0               14.6      34.26
     2Q’06         1,591           58.8           3.69%              8.7               38.6      52.62
15   3Q’06        1,862.7          94.0           5.05%             17.3               61.8      69.76
     4Q’06        2,140.5         111.6           5.22%             26.8                90        116
16

17             163.    The growing amount of gross REO and loan repurchases also negatively impacted

18   the Company’s liquidity. Repurchasing loans obviously requires cash, which negatively affects

19   liquidity. Large amounts of REO hurt Accredited’s liquidity because unsold REO creates no

20   cashflow. Increasing gross REO meant Accredited had huge illiquid assets on its balance sheet

21   that did not create cash flow to pay off liabilities the Company assumed in connection with those

22   assets.

23             164.    Defendants ultimately revealed on March 12, 2007, that the Company was facing

24   a liquidity crisis due to increased obligations to repurchase faulty loans and to answer margin

25   calls on its credit facilities stemming from devaluation of its loan portfolio:

26             Accredited Home Lenders Holding Co. (NASDAQ:LEND) (“Accredited” or
               “Company”) announced today that it is currently exploring various strategic
27             options, including raising additional capital to enhance liquidity and provide the
               Company with the flexibility to retain or sell originated loans based on an
28             assessment of the best overall return. Accredited’s available cash resources have
               been affected primarily by margin calls under its warehouse and repurchase
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 1          facilities since January 1, 2007, all of which have been met to date, as well as
            ongoing loan repurchases. The Company reported that it has paid approximately
 2          $190 million in margin calls on its facilities since January 1, 2007.
            Approximately two-thirds of those margin calls have been received and paid since
 3          February 15, 2007.
 4          In addition, Accredited is seeking waivers and extensions of waivers of certain
            financial and operating covenants under its warehouse and repurchase facilities,
 5          including waivers relating to required levels of net income. The Company has
            been operating under various waivers under these facilities since December 31,
 6          2006. There can be no assurance that the Company will be successful in
            receiving any of the required waivers.
 7
            Accredited also reported that it is pursuing certain cost restructuring initiatives,
 8          including further workforce reductions.

 9          165.    As set forth in the Company’s Schedule 14D-9 filed with the SEC on June 19,

10   2007, defendants attributed the cause of the Company’s liquidity crisis to margin calls on the

11   Company’s credit facilities as a result of the collateral for those facilities – the Company’s loans

12   – being marked down:

13          During the first two weeks of March, the Company’s warehouse lenders
            aggressively marked down collateral and the Company experienced additional
14          margin calls. These margin calls placed a severe strain on the Company’s
            liquidity and caused the Company to conduct an in-depth review of its market
15          position and strategies for dealing with the negative conditions in the market. In
            connection with this review, members of the Company’s senior management met
16          in early March with representatives of two investment banking firms, Bear,
            Stearns & Co. Inc. (“Bear Stearns”) and Friedman, Billings, Ramsey & Co., Inc.
17          (“FBR”), to discuss the ability of the Company to obtain an immediate infusion of
            capital.
18
            On March 11th, at a special meeting, the Board reviewed and discussed with
19          management the Company’s situation, including increased margin calls and the
            resulting pressure on the Company’s liquidity. The Board also noted that the
20          closing price of the Common Stock on the Nasdaq on the preceding business day
            (Friday, March 9), was $15.78 per share.
21
            The discussion then turned to a possible financing transaction. Management
22          reported that, based on its discussions with Bear Stearns and FBR, it was highly
            unlikely that any investor would provide debt financing to the Company without
23          an equity incentive, such as warrants to purchase shares of Common Stock, and
            that an equity capital raise in an amount sufficient to meet the Company’s
24          immediate needs would have to be at a level and at a price which would be
            substantially dilutive to existing stockholders.
25
            An extensive discussion of the available options for the Company followed,
26          including discussion of a possible private placement of equity or debt securities
            and a possible sale of the Company. Management reported on the potential
27          counterparties with which discussions were being pursued, including Farallon
            Capital Management, L.L.C. (“Farallon”). The Board also discussed the
28          possibility that, if the Company were unable to complete a capital raising
            transaction and conditions in the marketplace continued to deteriorate, with
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 1          further erosion in the Company’s liquidity, a bankruptcy filing might be
            necessary.
 2
            166.    Thus, the Company suffered a near bankruptcy because, according to
 3
     Accredited’s own admissions, the Company’s lenders issued large margin calls after discovering
 4
     the Company’s collateral – its loan portfolio – was impaired. As set forth herein, the portfolio
 5
     was impaired because of defendants’ fraudulent scheme to inflate loan volume. See Section
 6
     II.D.3. Defendants’ concealment of material risks concerning the Company’s creditworthiness
 7
     was a substantial factor in causing plaintiffs’ losses.
 8
            167.    The price of the preferred shares issued by the REIT also collapsed as a result of
 9
     defendants’ fraudulent scheme and near bankruptcy.           Throughout the Class Period, until
10
     February 7, 2007, the REIT’s preferred shares traded at or above the shares’ initial offering price
11
     of $25 and the shareholders received an annual dividend of 9.75%. Prior to December 2006, the
12
     preferred stock never closed below $25; and, prior to February 7, 2007, the preferred stock never
13
     traded below $24.85. Then, as a result of defendants’ disclosures on and prior to March 13,
14
     2007, revealing the precarious financial condition of the Company, and therefore the REIT, the
15
     preferred stock closed at only $8.25 on March 13, 2007.
16
            168.    Defendants’ disclosures after the end of the Class Period, as further detailed in
17
     Section II.F., further establish that defendants knew about problems with the loan portfolio that
18
     created the liquidity crisis, but that defendants concealed facts concerning the extent of the
19
     problems with the loan portfolio.
20
            169.    During the last several months of the Class Period, defendants concealed facts
21
     concerning the substantial increase in mortgage loans held for investment 90+ day delinquent.
22
     After the Class Period, on August 2, 2007, the Company revealed in its Form 10-K that the MLI
23
     90+ days delinquent as of December 31, 2006 had increased to $316.25 million from only
24
     $136.84 million the quarter before and $71.36 million at the end of 2005. Thus, the Company’s
25
     90+ day delinquencies in MLI had grown by over 231% from the prior quarter and over 443%
26
     from the prior year. This dramatic increase in the Company’s 90+ day delinquent loans indicated
27
     to defendants that the Company’s loan portfolio contained a number of mortgages that would not
28
     be repaid. Rather than disclose the fact that the Company’s delinquencies had grown by such a
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 1   large amount, the defendants concealed the MLI 90+ day delinquency amount until August 2,

 2   2007, when the Company was forced to disclose the amount in its Form 10-K filing.

 3          170.    On August 10, 2007, the Company filed a Form 12b-25 with the SEC, signed by

 4   defendant Konrath, in which the Company reported it could not timely file its Form 10-Q filings

 5   for the periods ending March 31, 2007 and June 30, 2007. Moreover, the Company’s Form 10-Q

 6   disclosed: “Delinquent loans (30 or more days past due, including foreclosures and real estate

 7   owned) comprised 11.71% of the serviced portfolio at June 30, 2007, compared to 8.26% and

 8   3.86% at December 31, 2006 and June 30, 2006, respectively.”

 9          E.      Defendants’ False And Misleading Statements

10                  1.     Defendants’ Statements Before The Class Period

11          171.    Prior to the Class Period, defendants repeatedly represented to the marketplace

12   that the Company was conservatively growing its business in a diligent manner without

13   sacrificing credit quality to increase the volume of the Company’s business.

14          172.    For example, on September 12, 2005, prior to the Class Period, an interview of

15   defendant Konrath was published in the Asset Securitization Report titled:            “Accredited’s

16   Konrath talks strategy in bubble environment.” In the interview, defendant Konrath discussed

17   Accredited’s strategy for growing its business successfully.        As a part of the discussion,

18   defendant Konrath – as he and the other defendants would do throughout the Class Period –

19   emphasized that Accredited was focused on credit quality more than increasing the volume of

20   loans it originated, and that Accredited’s underwriting procedures were better and more

21   conservative than those of other sub-prime lenders. According to Konrath, Accredited paid

22   managers to pursue disciplined growth in volume:

23          A large part of the sales manager’s compensation is paid on the profits of their
            particular unit, so I think that helps to drive the pricing discipline. If something
24          changes on a loan, our people are more willing to price the loan to its inherent risk
            because they are not just paid for volume, but primarily paid for profit. And the
25          portfolio is better protected because if the loan does not sell, or it is repurchased,
            any loss on that loan is charged back to the origination team.
26
                                              *       *       *
27
            As a result, our people and processes are very focused on rooting out fraud, and
28          other problems that would affect the profitability of a loan.

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 1           Another key component of maximizing the profitability of a loan is data integrity.
             I think we know more about our borrower and what is in our loan files than our
 2           competitors know about what is in their loan files. Delivering the most accurate
             and complete loan files is another way that our people can maximize the profit in
 3           their individual units and thereby increase their personal compensation.

 4           173.    By the beginning of the Class Period, on November 1, 2005, it was no longer true

 5   that Accredited was focused on disciplined growth of its loan originating business. Rather, as

 6   detailed in Section II.D.3 above, increasingly during 2005 and by no later than the beginning of

 7   the Class Period, Accredited increased the volume of loans it originated by extending credit to

 8   individuals whose creditworthiness did not fit within the Company’s own credit underwriting

 9   guidelines.

10                   2.      Defendants’ Statements During The Class
                             Period, Before Investors Begin To Learn The Truth
11
             174.    On November 1, 2005, Accredited issued a false and misleading press release
12
     entitled “Accredited Announces 3Q 2005 results; Company Sets Quarterly Records for Net
13
     Income, Cost to Originate, Loans On-Balance Sheet, and Originations.” The release stated in
14
     part:
15
             Accredited Home Lenders Holding Co., a nationwide mortgage company.
16           specializing in non-prime residential mortgage loans, today announced that net
             income for the quarter ended September 30, 2005 was $41.3 million, or $1.87 per
17           share on a fully-diluted basis, an increase of 15.1% compared to net income of $35.9
             million, or $ 1.66 per share, for the comparable period in 2004. Total net revenues for the
18           quarter increased by 19.8% to $151.8 million from $126.6 million for the comparable
             period in 2004. Net cost to originate mortgage loans was 1.57% for the quarter,
19           compared to 1.92% for the third quarter of 2004.
20           Chairman and CEO James Konrath said, “Accredited continues to realize its
             profitability targets, despite a challenging environment. These third quarter results
21           demonstrate the effect of our unwavering focus on reducing costs to drive
             profitability. Our cost to originate reached a record low of 1.57%, while our on-
22           balance sheet portfolio continued to grow.”
23           Mr. Konrath added, “Our results reflect a proven business model, built on consistent
             operating disciplines, excellent business partnerships, and experienced and talented
24           employees. We remain confident in our ability to grow our business for the remainder
             of 2005 and beyond.”
25
                                                     *       *        *
26
             Loan Originations
27
             The company originated $4.5 billion of mortgage loans for the quarter ended September
28           30, 2005, compared to $3.2 billion of mortgage loan originations in 3Q 2004, an
             increase of 39.7%.
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 1                                                *       *       *

 2          Portfolio Performance and Loan Servicing

 3          The company’s total serviced portfolio equaled $9.2 billion at September 30, 2005. The
            serviced portfolio increased 49.4% from $6.1 billion at September 30, 2004. This was
 4          primarily due to the company’s quarterly securitization program and an increase in the
            loans held for sale. Delinquent loans (30 or more days past due, including foreclosures
 5          and real estate owned) were 1.95% of the serviced portfolio at September 30, 2005, and
            1.79%, 1.72%, and 1.74% for the three previous quarters.
 6
                                                  *       *       *
 7
            Earnings Guidance
 8
            The increase in the portfolio, the reduction in our cost to originate, and the
 9          company’s strong results for the first three quarters of 2005 provide the basis for
            reiterating earnings guidance of $7.05 per share for the total year 2005. The forecast
10          for the balance of 2005 assumes:

11                 •      Origination volume consistent with or slightly higher than the
                          previous two quarters
12
                   •      Whole loan premiums below the third quarter as rate increases have
13                        lagged increases in the cost of funds in the non-prime mortgage
                          origination market
14
                   •      Continued focus on the cost of origination .
15
                   •      Continued portfolio growth
16
            Consistent with its practice in prior years, the company plans to issue 2006 guidance
17          before the end of the year; however, management reaffirms its goal of 15% average
            annual growth in earnings per share.
18
            175.   After issuing the press release on November 1, Accredited hosted a conference
19
     call for investors and analysts at which defendants made a number of false and misleading
20
     statements consistent with the Company’s press release. The defendants participating in the
21
     conference call included Konrath, Lydon, Marvin and Buchanan, all of whom acquiesced to each
22
     of the other defendants’ false and misleading statements. During the call, defendant Konrath
23
     reiterated the Company originated $4.5 billion in loans and the Company’s “focus on originating
24
     profitable loans resulted in net whole loan sales premiums of 3.07%.” Defendant Buchanan
25
     labeled the Company’s loan production a “solid third quarter up 40% from the prior year and 9%
26
     from the second quarter.” Konrath reaffirmed the Company was “confident in reaffirming
27
     management’s previously stated goal of 15% average annual growth rate in earnings per share.”
28

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 1   Konrath further noted that to achieve these results, “performance of [the loan] portfolio is

 2   absolutely critical. As you can see, our delinquency and loss continue at very low levels.”

 3          176.    Reporting on the Company’s published financial results, the American Banker

 4   noted the Company’s “surprising margin” that was “quite a bit higher than their peers.” The

 5   article also quoted defendant Konrath, who misleadingly spoke with the American Banker after

 6   the Company’s conference call about Accredited’s dedication and adherence to underwriting

 7   policies:

 8          “When we talk to our investors, our buyers of whole loans, we ask them, ‘For the
            same portfolio, how does ours perform versus everybody else they’re buying
 9          from?’ And most major loan buyers will say ours perform better,” he said in an
            interview after Accredited’s third-quarter earnings conference call Tuesday.
10
            Further, Accredited historically has “approached the underwriting process a little
11          differently,” Mr. Konrath said. “We do a second underwrite ... before we send out
            the note to the borrower to be signed.” Because of that practice, “we have a better
12          idea of what’s in our files than competitors, and the end result is we know how to
            price that risk.”
13
            177.    Analysts responded very favorably to defendants’ false and misleading
14
     statements.   For example, on November 1, 2005, Friedman, Billings, Ramsey & Co., Inc.
15
     published an analyst report written by Scott Valentin that stated:
16
            This morning, LEND reported a very strong quarter of $1.87, ahead of our $1.76
17          estimate and the Street’s $1.84. Aside from the better earnings for the period, the
            company revised guidance to the upper end of its range of $6.90-$7.05 to $7.05
18          for 2005. . . . The quarter was fundamentally strong, and we reiterate our
            Outperform ratings on the shares of LEND, with a $49 price target, while we are
19          putting our EPS estimates under review.

20          178.    Similarly, on November 7, 2005, Roth Capital Partners issued an analyst report

21   commenting on Accredited’s third quarter financial results, which stated:

22          LEND Get’s It! “Profit” Culture Lays Foundation For One Of The Few SFR
            “Franchises”
23
            •       In the single family residential (SFR) lending sector, which is appallingly
24                  bereft of barriers to entry and franchise value, LEND has built what few
                    can replicate …
25
            •       …a culture of commitment (to return) and a reputation for a quality, which
26                  go hand-in-hand

27          •       Because the business is liquidity-driven--i.e., the liquidity provided by the
                    global fixed-income markets--access to liquidity at a reasonable cost is of
28                  paramount importance

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 1          •       To ensure access to this liquidity, the overarching goals of the
                    organization are to produce high quality loans--those likely to perform--
 2                  that are appropriately priced for the risk elements present
 3          •       Critical to meeting these goals is the company’s “profit” culture, a
                    system of procedures and incentives designed to encourage “bottom-line”
 4                  thinking through every level of the organization
 5                                               *      *       *

 6          •       However, by maintaining its commitment to the variables it can control--
                    credit quality, pricing and cost--LEND may not only navigate through the
 7                  near-term headwinds, but provide some upside to both our estimates and
                    price target.
 8
            179.    As a result of defendants’ false statements, as repeated by analysts, Accredited’s
 9
     stock price increased. After closing on October 31, 2005 at $36.14, Accredited’s stock price
10
     climbed to a close of $38.76 on November 1, 2005.
11
            180.    On November 9, 2005, the Company filed its Form 10-Q for the third quarter of
12
     2005, which included the same false and misleading financial results previously reported to
13
     investors on November 1, 2005. The Form 10-Q also falsely stated that the Company was “in
14
     compliance with all covenant requirements for each of the [Company’s credit] facilities.”
15
            181.    The Form 10-Q also included certifications by defendants Konrath and Buchanan
16
     attesting to the accuracy of the Company’s financial statements and the adequacy of the
17
     Company’s internal controls over financial reporting. The certifications, attached hereto in full
18
     as Exhibits “A” and “B,” were substantially identical. Defendant Konrath’s certification states:
19
            I, James A. Konrath. certify that:
20
                    1. I have reviewed this Form 10-Q of Accredited Home Lenders Holding
21          Co.;
22                 2. Based on my knowledge, this report does not contain any untrue
            statement of a material fact or omit to state a material fact necessary to make the
23          statements made, in light of the circumstances under which such statements were
            made, not misleading with respect to the period covered by this report;
24
                    3. Based on my knowledge, the financial statements, and other financial
25          information included in this report, fairly present in all material respects the financial
            condition, results of operations and cash flows of the registrant as of, and for, the
26          periods presented in this report;
27                  4. The registrant’s other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as defined in
28          Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
            reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the
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 1          registrant and have:

 2                   a) Designed such disclosure controls and procedures, or caused such
                        disclosure controls and procedures to be designed under our
 3                      supervision, to ensure that material information relating to the
                        registrant, including its consolidated subsidiaries, is made known to us by
 4                      others within those entities, particularly during the period in which this
                        report is being prepared;
 5
                     b) Designed such internal controls over financial reporting, or caused such
 6                      internal controls over financial reporting to be designed under our
                        supervision, to provide reasonable assurance regarding the reliability of
 7                      financial reporting and the preparation of financial statements for
                        external purposes in accordance with generally accepted accounting
 8                      principles;

 9                     c) Evaluated the effectiveness of the registrant’s disclosure controls and
                          procedures and presented in this report our conclusions about the
10                        effectiveness of the disclosure controls and procedures, as of the end of
                          the period covered by this report based on such evaluation; and
11
                     d)    Disclosed in this report any change in the registrant’s internal control
12                         over financial reporting that occurred during the registrant’s most
                           recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
13                         an annual report) that has materially affected, or is reasonably likely to
                           materially affect, the registrant’s internal control over financial
14                         reporting; and

15                 5. The registrant’s other certifying officer and I have disclosed, based on our
            most recent evaluation of internal control over financial reporting, to the registrant’s
16          auditors and the audit committee of the registrant’s Board of Directors (or persons
            performing the equivalent function):
17
                       a) All significant deficiencies and material weaknesses in the design or
18                        operation of internal control over financial reporting which are
                          reasonably likely to adversely affect the registrant’s ability to record,
19                        process, summarize and report financial information; and

20                     b) Any fraud, whether or not material, that involves management or
                          other employees who have a significant role in the registrant’s
21                        internal control over financial reporting.

22          182.   Defendants’ statements to the marketplace in ¶¶174-182 were false and

23   misleading for the reasons set forth in Section II.D. As set forth in greater detail in Section

24   II.D.4., the Company violated GAAP by reporting net income for the quarter ended September 30,

25   2005, was $41.3 million, or $1.87 per share. That number was artificially inflated. Defendants

26   manipulated the Company’s ALL by at least $18.14 million in the quarter. See Section II.D.4.a.

27   The net income number was also artificially inflated because defendants manipulated the

28   Company’s Repurchases Reserve and REO Reserves by not increasing those reserves to take into

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 1   account increasing violations of the Company’s underwriting policies. See Sections II.D.4.b. and

 2   II.D.4.c. Furthermore, defendants failed to disclose the Company had deviated substantially

 3   from its underwriting policies to drive up loan volume, as set forth in Section II.D.3., which was

 4   a material omission making their statements false and misleading. And, defendant Konrath’s

 5   statements printed in the American Banker were false and misleading because his assertion that

 6   Accredited’s underwriting standards were “better” than competitors and his reference to the

 7   Company’s historic underwriting process were misleading because he failed to disclose the

 8   departure from the stated underwriting policies and procedures at the Company.

 9          183.    On November 18, 2005, a Friday, defendant Konrath appeared on the popular

10   cable television show Jim Cramer’s Mad Money. Cramer had previously been negative on

11   Accredited, but changed his opinion after defendant Konrath’s representations addressing

12   Cramer’s concerns about Accredited. Among other things, Konrath stated that Accredited had

13   experienced “long-term superior performance on our mortgage-backed securities.”              This

14   statement was false and misleading because defendant Konrath did not disclose that the

15   Company had abandoned its conservative underwriting policies to increase the volume of loans it

16   was then underwriting. At least in part because of Konrath’s appearance on Mad Money,

17   Accredited shares spiked. After closing on November 18, 2005 at $42.24, the stock closed on

18   November 21 at $44.85 and closed at $46.48 on November 22.

19          184.    On November 23, 2005, Accredited’s REIT subsidiary securitized $1.2 billion of

20   residential mortgages. Accredited issued a false and misleading press release concerning the sale

21   of these asset backed securities (“ABS”), in which defendant Konrath is quoted as stating:

22   “‘Pricing for this securitization was exceptional, resulting in some of the tightest spreads found

23   in recent ABS transactions for our industry. We are pleased that the ABS market continues to

24   reward Accredited’s superior underwriting platform and portfolio performance with such
25   favorable pricing.’”

26          185.    Defendant Konrath’s statement, issued in the Company’s press release, was false

27   and misleading because, as is detailed in Section II.D.3. herein, defendants caused the Company

28

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 1   to deviate from its underwriting policies and caused Accredited to be contractually liable for

 2   violations of representations made by it in the sale of its mortgages.

 3          186.    On November 29, 2005, defendants Konrath and Lydon presented at the

 4   Friedman, Billings, Ramsey & Co., Inc. 2005 Investor Conference. According to a November

 5   30, 2005 analyst report issued by Friedman, Billings, Ramsey, defendants misleadingly

 6   represented that the Company’s management expected 2006 losses to deteriorate “slightly” from

 7   2005 levels and that the Company’s historical loan performance above industry rates could be

 8   attributable to the Company’s underwriting strategy, including its procedure “which entails each

 9   loan being underwritten twice.”

10          187.    Defendants Konrath and Lydon’s statements during the 2005 Investor Conference

11   were false and misleading, as is detailed in Section II.D.3., because, as defendants knew but

12   failed to disclose, defendants had caused the Company to abandon adherence to its underwriting

13   policies. Therefore, it was misleading to draw comparisons between the Company’s historical

14   loan performance and the expected performance of loans then being originated by the Company.

15          188.    On December 19, 2005, the Company issued a press release entitled “Accredited

16   Sets 2006 EPS Guidance.” The press release stated in part:

17          Accredited Home Lenders Holding Co. announced today its full year 2006 earnings per
            fully-diluted share (EPS) guidance at $7.70-$8.00. The 2006 forecast assumes:
18
            •   Growth in originations from an expanding platform;
19
            •   Interest rate spreads on originations below average 2005 spreads resulting in
20
                    •       Lower average gain on whole loan sales
21
                    •       Reduced margin from the portfolio
22
            •   Similar mix of loan dispositions between securitizations and whole loan sales;
23              and

24          •   Continued focus on reducing the cost of origination
25          Accredited Chairman and CEO James Konrath said, “Accredited has always focused on its
            fundamental business strategies - profit-based disciplines, diversification, and leveraging our
26          experienced management team - that have served us well over the past 15 years. We believe that
            the critical issues facing the industry in the months ahead will be the ability to improve spreads
27          and margins through appropriate pricing. Our mandate remains to be a leader in maximizing
            net revenue and reducing costs in order to deliver consistent profits.”
28

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 1          189.    The marketplace responded favorably, as illustrated by PiperJaffray’s analyst

 2   report issued December 19, 2005, labeling the forecast as “very impressive.” As a result of the

 3   false and misleading forecast, Accredited’s stock rose dramatically from a close on December

 4   15, 2005 of $44.78 to a close on December 16, 2005 of $46.71 and then a close on December 19,

 5   2005 of $48.50.

 6          190.    The December 19, 2005 press release was false and misleading for the reasons set

 7   forth in Section II.D. As set forth in greater detail in Section II.D.4., the Company’s reported

 8   financial results in the quarter prior to the December 19 press release violated GAAP because

 9   defendants manipulated the Company’s ALL. See Section II.D.4.a. The net income number was

10   also artificially inflated because defendants manipulated the Company’s Repurchases Reserve

11   and REO Reserves by not increasing those reserves to take into account increasing violations of

12   the Company’s underwriting policies.        See Sections II.D.4.b. and II.D.4.c.     This made any

13   projection of future financial results building on the Company’s prior results false and

14   misleading. Furthermore, defendants failed to disclose the Company had deviated substantially

15   from its underwriting policies to drive up loan volume, as set forth in Section II.D.3., which was

16   a material omission which made their statements false and misleading in that the financial

17   projections were based on an undisclosed risky business practice.

18          191.    On February 14, 2006, the Company issued a press release entitled “Accredited

19   Reports Record Results for 2005; Loans On-Balance Sheet up 47%; Originations up 34%; Cost

20   to Originate down 15%; Net Income up 19% in 2005.” The press release stated in part:

21          Accredited Home Lenders Holding Co., a nationwide mortgage company
            specializing in non-prime residential mortgage loans, today announced record results for
22          the quarter and year ended December 31, 2005.

23          Net income for the year ended December 31, 2005 was $155.4 million, or $7.07 per
            share on a fully-diluted basis, an increase of 18.9% over $130.8 million for the year
24          ended December 31, 2004. Total net revenues for the year increased 21.1% to $568.6
            million from $469.6 million the prior year.
25
            Net income for the quarter ended December 31, 2005 was $43.3 million, or $1.96 per
26          share on a fully-diluted basis, an increase of 13.6% over net income of $38.1
            million for the comparable period in 2004. Total net revenues for the quarter
27          increased by 11.5% to $ 150.1 million from $134.6 million for the comparable period in
            2004.
28

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 1         Chairman and CEO James Konrath said, “Accredited met the challenge of a volatile
           2005 for the non-prime mortgage industry by relying on the strength of our proven
 2         business model that features profitable origination and portfolio growth, minimizing
           our net cost to originate, and leveraging our experienced management team. In
 3         addition, the record results reflect the strength and commitment of our business
           partners, and of course, our world-class employees across the United States and in
 4         Canada.”

 5         Mr. Konrath added, “We expect 2006 to present an equally challenging environment
           that we are confronting with the same determination, confidence and focus, which
 6         were successful in 2005. To meet that challenge and continue to excel, Accredited will
           strengthen the primary factors that differentiate it in the marketplace, particularly our
 7         commitment to managing for profit, portfolio quality, and diversified loan
           originations, financing and dispositions.”
 8
                                                   *       *       *
 9
           Portfolio Performance and Loan Servicing
10
           The company’s servicing portfolio, including $90.2 million of liquidating off-balance
11         sheet securitizations, totaled $9.7 billion at December 31, 2005. The serviced portfolio
           increased 44.2% from $6.7 billion at December 31, 2004. This was primarily due to
12         the company’s quarterly securitization program and an increase in the loans held for
           disposition. Delinquent loans (30 or more days past due, including foreclosures and
13         real estate owned) were 2.47% of the serviced portfolio at December 31, 2005,
           compared to 1.95% at September 30, 2005 and 1.74% at December 31, 2004.
14         Delinquency levels remain well within management’s expectations and continue
           to be substantially below published industry averages.
15
           Liquidity
16
           The company had approximately $5.2 billion in warehouse credit capacity at December
17         31, 2005. At the end of December, the company had used $2.8 billion of this capacity.
           The company had a record $356.4 million in available cash and additional liquidity
18         at December 31, 2005.

19                                                *        *       *

20         Earnings Guidance for 2006

21         For the total year 2006, the company affirms its previous earnings guidance of $7.70-
           $8.00 per share. Achieving the earnings growth projected for 2006 will depend, in
22         large part, on the impact of the industry and competitive environment on rates and
           margins. Earnings per share are expected to be at the top of the range if the industry
23         continues the fourth quarter trend of increasing the spread between the rates to borrowers
           and the cost of funds. Earnings per share are estimated at the lower end of the range if
24         these spreads remain at year-end 2005 levels.

25         Earnings Guidance for First Quarter

26         For the first quarter of 2006, the company expects earnings to increase from prior year
           in proportion with its annual guidance.
27
           192.    After issuing the press release on February 14, Accredited hosted a conference
28
     call for investors and analysts at which defendants made a number of false and misleading
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 1   statements.   The defendants participating in the conference call included Konrath, Lydon,

 2   Marvin and Buchanan, all of whom acquiesced to each of the other defendants’ false and

 3   misleading statements.

 4          193.    During the conference call, defendant Konrath falsely and/or misleadingly

 5   responded to a question from Jim Fowler, an analyst with JMP Securities, concerning the credit

 6   quality of Accredited’s loan portfolio and how the Company’s expected delinquency rates would

 7   be impacted if financing costs continued to rise:

 8          FOWLER: [ ] I guess the question is also, what happens if we see financing costs
            continue to rise and borrowers need to have lower mortgage payments in order for
 9          delinquency rates not to rise. . . .

10          Would you expect delinquency and loss rates to rise materially for the industry,
            for yourselves? I know it’s a bit of conjecture, but we have seen this migration of
11          different products that have served to make payments lower even though
            affordability rates continue to rise.
12
            JAMES KONRATH:
13
                                              *          *     *
14
            And so, the answer, I guess, to your question is what happens to delinquency and
15          losses do they increase and I think the answer is absolutely yes. I think they
            increase for the industry and I think they would increase for us as well. But
16          having said that, I think we have to look at where delinquency and losses have
            been. They are extremely low. They are at rates and ratios that quite frankly in
17          the -- now almost 30 years that I’ve been making loans to borrowers who are
            probably not Fannie Mae borrowers, this is as low as it’s ever been. And I think
18          part of that has been the decline in interest rates and the rising housing prices.

19          However, if we look at our own portfolio, and we see some of the strongest
            credit in terms of FICO score, we see good income coverage, what we’re seeing
20          is lots of borrowers have more equity now than when they took out the loan, lots
            of the salary and wage markets have been strong, so borrowers have increased
21          income. It may not be quite as easy as it was, but I think the portfolio is
            extremely strong, and while we do expect to see some problems at least under
22          this economic scenario, we don’t think they’re going to be very severe at all.
23          194.    Defendant Lydon similarly responded to a question about the creditworthiness of

24   the Company’s loan portfolio, stating falsely and/or misleadingly:        “[W]e’ve been in the

25   business, managing risk for a long time. We have got excellent credit people who understand the

26   concept of rate versus risk. And we’re pretty confident that we can manage this topic pretty

27   well. At the end of the day, we’ve got reserve levels at 145 basis points. And we think we’ve

28   got more than adequate coverage on that front as well.”

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 1          195.    Defendants’ statements to the marketplace in ¶¶191-194 were false and

 2   misleading for the reasons set forth in Section II.D. As set forth in greater detail in Section

 3   II.D.4., the Company violated GAAP by reporting net income for the quarter ended December 31,

 4   2005, was $43.3 million, or $1.96 per share. That number was artificially inflated. Defendants

 5   manipulated the Company’s ALL by at least $41.40 million (in the quarter, with a cumulative

 6   effect of $59.54 million). See Section II.D.4.a. The net income number was also artificially inflated

 7   because defendants manipulated the Company’s Repurchases Reserve and REO Reserves by not

 8   increasing those reserves to take into account increasing violations of the Company’s

 9   underwriting policies.     See Sections II.D.4.b. and II.D.4.c. Furthermore, defendants failed to

10   disclose the Company had deviated substantially from its underwriting policies to drive up loan

11   volume, as set forth in Section II.D.3., which was a material omission which made their

12   statements false and misleading. Defendants’ assertion that the Company was committed to

13   “portfolio quality” to “differentiate it in the marketplace” from other sub-prime lenders was false

14   and misleading for the same reasons.          And, defendant Konrath’s statements during the

15   conference call that “the portfolio is extremely strong” (in terms of credit quality) and that

16   problems caused by an economic downturn would not “be very severe at all” were false and

17   misleading in light of the true facts concerning the Company’s complete deviation from its

18   underwriting guidelines as set forth in Section II.D.3. Defendant Lydon’s assertion that the

19   Company’s reserves were “more than adequate” was also false and misleading as the Company

20   had not accounted for the reserves sufficiently so that it could falsely manipulate earnings, as set

21   forth in Section II.D.4.

22          196.    The Company’s financial results set forth in ¶¶191-194 were primarily in line

23   with expectations and sustained the stock price.

24          197.    On March 16, 2006, the Company filed its Form 10-K for the fiscal year 2005,

25   which included the same false and misleading financial results previously reported to investors

26   on February 14, 2006.

27          198.    The Form 10-K also included certifications by defendants Konrath and Buchanan

28   attesting to the accuracy of the Company’s financial statements and the adequacy of the

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 1   Company’s internal controls over financial reporting. The certifications, attached hereto in full

 2   as Exhibits “C” and “D,” were substantially identical and both are similar to the certification

 3   included herein at ¶181.

 4          199.   In Accredited’s Form 10-K for the fiscal year 2005, filed with the SEC on March

 5   16, 2006, defendants falsely and misleadingly assured investors that the Company was taking a

 6   “disciplined” strategy to growing the business by implementing specific business practices that

 7   would ensure the Company originated profitable loans and did not – as investors feared was the

 8   case with certain of Accredited’s rival sub-prime lenders – seek to grow volume by sacrificing

 9   credit quality. Defendants described Accredited thusly:

10          Description of Our Business
11          We are a mortgage banking company operating throughout the United States and
            in Canada that originates, finances, securitizes, services and sells non-prime
12          mortgage loans secured by residential real estate. We focus on borrowers who
            may not meet conforming underwriting guidelines because of higher loan-to-
13          value ratios, the nature or absence of income documentation, limited credit
            histories, high levels of consumer debt, or past credit difficulties. We originate
14          loans primarily based upon the borrower’s willingness and ability to repay the
            loan and the adequacy of the collateral. Our experienced management team
15          has developed incentive programs, technology tools and business processes that
            focus our employees on originating non-prime mortgage loans with the
16          financial and other characteristics that generate profits for us. We believe that
            this business approach has contributed to our disciplined growth in both
17          origination volume and profits.

18          200.   Defendants further misleadingly described the Company’s purported zeal in

19   achieving “disciplined growth” while “maximizing the quality and profitability of each loan

20   originated” in the Form 10-K:

21
            Our business processes incorporate cross-departmental review and feedback that
22          are designed to assist each department in maximizing the quality and profitability
            of each loan originated. We have developed our incentive programs, technology
23          tools and business processes over time, and we are constantly reviewing and
            updating them to meet our evolving needs. We believe that this business
24          approach has contributed to our disciplined growth in both origination volume
            and profits.
25
            201.   The Form 10-K also includes false and misleading statements lauding the
26
     Company’s purported structural integrity designed to assure the origination of high-quality loans
27
     that strengthened the Company’s “relationships with warehouse line providers, whole loan
28
     purchasers, rating agencies and others with whom [Accredited did] business,” when in fact that
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 1   was misleading as the Company and its employees were intentionally deviating from this system

 2   of checks and balances by continually overriding the decisions of the Company’s underwriting

 3   teams as detailed in Section II.D.3.:

 4          Our Business Processes—Teamwork and Checks And Balances

 5          We have two principal components to our business. We originate and underwrite
            loans, and we sell or securitize and service our loans. We have an integrated
 6          approach to these activities that encourages teamwork and the sharing of
            information across divisions. Our approach also promotes slightly different goals
 7          for different divisions that results in meaningful, real-time, daily checks and
            balances throughout our organizational structure.
 8
                                             *        *       *
 9          For example, origination team personnel can process and present loans, but if the
            loans do not meet the quality standards of the corporate underwriting teams or the
10          profit objectives of the origination team and division, the loans will not be
            approved or, if approved, will not be eligible for bonuses or commissions.
11
            These checks and balances have been built into our origination and underwriting
12          processes and are bolstered by our incentive programs and technology tools. Our
            loan officers and account executives work closely with our underwriting group to
13          ensure that the loan applications that they originate meet the quality standards
            necessary to make it through the underwriting and funding process. The first
14          step is a comprehensive underwriting by the origination team supporting our
            account executives and loan officers. Then, before the loan documents can be
15          prepared, the loan is reviewed and audited by a corporate underwriter who does
            not report to the origination team. When the team has gathered any required
16          conditions (sometimes called stipulations), loan documents are reviewed by the
            documents and funding team or a corporate underwriter before funding. After
17          funding the loan documents are reviewed by our documents and funding teams
            again to ensure accuracy, to make corrections to the documents if necessary and
18          to reflect any changes that may have been made by the closing agent.

19                                              *      *   *

20          We believe that our commitment to originating high-quality loans strengthens
            our relationships with warehouse line providers, whole loan purchasers, rating
21          agencies and others with whom we do business.
22          202.    Accredited’s Form 10-K also falsely described the Company’s underwriting

23   criteria, misleadingly assuring purchasers of Accredited securities that the Company engaged in

24   a “rigorous” process of reviewing creditworthiness of borrowers and aimed to achieve “high-

25   quality” loans when, in fact, Accredited was knowingly inflating its earnings by increasing

26   volume while sacrificing credit quality:

27          Our Underwriting Process and Guidelines

28          Each mortgage loan that we originate is underwritten prior to loan closing in
            accordance with our underwriting guidelines. We have developed underwriting
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 1          processes and criteria that we believe generate high-quality non-prime loans.
            Our underwriting guidelines are designed to help us evaluate a borrower’s credit
 2          history, his or her capacity, willingness and ability to repay the loan, and the value
            and adequacy of the collateral. In addition, we review credit scores derived from
 3          the application of one or more nationally recognized credit-scoring models. Our
            underwriting philosophy is to analyze the overall situation of the borrower and to
 4          take into account compensating factors that may be used to offset certain areas of
            weakness, including employment stability, number of years at residence and
 5          disposable income. Based upon this analysis and the information derived from
            the Revenue Calculator, we determine loan terms and conditions to produce loans
 6          that we believe are appropriately priced and sized, meet our quality standards,
            and are profitable. In addition, our underwriters must determine what we believe
 7          to be a benefit to the borrower for each loan they underwrite. Our underwriting
            process and guidelines require a rigorous application review and
 8          documentation designed to maximize the value of our mortgage loans.
 9          203.       Notably, defendants sought to differentiate themselves from other sub-prime

10   lenders by expressly claiming to be more “conservative” and committed to “sustained

11   profitability” when, in fact, Accredited was engaging in reckless lending practices to falsely

12   inflate growth:

13          We believe that our competitive strengths are:

14              •      Growth Using Conservative Management Principles. We focus on
                       originating high-quality loans and generating predominately cash
15                     earnings rather than non-cash gain on sale earnings. We have increased
                       our loan originations and revenue every year since inception using our
16                     conservative management principles.
17              •      Profit-Based Business Model and Supporting Tools. We have created a
                       culture that provides economic incentives to our employees to assess the
18                     risk in our loans correctly, report the risk accurately, and price the risk so
                       as to assure both fairness to the borrower and profits to our company. We
19                     believe that our profit-oriented philosophy and technology tools give us a
                       competitive advantage by directly rewarding our employees for
20                     contributing to our fundamental business goal of sustained profitability.
21                                               *       *       *

22          We believe these strengths enable us to originate better-performing, non-prime
            loans, and grow a more profitable, more conservatively managed company than
23          many of our competitors.
24          204.       Defendants’ statements contained in the Form 10-K were false and misleading for

25   the reasons set forth in Section II.D. The Company’s “business approach” did not result in

26   “disciplined growth” but rather defendants were causing the Company to disregard underwriting

27   policies and originate risky loans in an effort to grow loan volume. The Company wasn’t

28   originating loans primarily based on the borrower’s willingness and ability to pay, but rather was

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 1   originating loans to borrowers who likely could not repay them in an effort to meet financial

 2   projections (particularly at the end of reporting periods). The Company said “loans [that] do not

 3   meet the quality standards of the corporate underwriting teams … will not be approved or, if

 4   approved, will not be eligible for bonuses or commissions,” but it was a regular practice at the

 5   Company for loans to be approved over the denial of the Company’s underwriting teams and

 6   such loans still qualified for bonuses and commissions.        The Company did not have a

 7   “commitment to originating high-quality loans” but disregarded loan quality to drive up loan

 8   volume. It was not true that “each mortgage loan” the Company originated was “underwritten

 9   prior to loan closing in accordance with [the Company’s] underwriting guidelines.” It was

10   misleading to describe Accredited as “more conservatively managed” than its competitors

11   because Accredited had abandoned its underwriting standards to achieve greater volume.

12          205.   The market reacted favorably to defendants’ false and misleading statements in

13   the Company’s Form 10-K. After the Company’s stock closed at $49.86 on March 15, 2006, it

14   closed at $52.50 on March 16 and $53.05 on March 17.

15          206.   Shortly after issuing the Company’s Form 10-K for 2006, Defendants caused the

16   Company to issue a false and misleading annual report to shareholders that the Company posted

17   to its website. The annual report incorporates the Company’s false and misleading Form 10-K

18   and also includes a false and misleading letter to shareholders from defendants Konrath and

19   Lydon, which states:

20          To our Fellow Stockholders

21          Accredited Home Lenders turned in another record year of business and profit
            growth in 2005.
22
            Our solid performance in 2005 gave testimony to a proven business model and the
23          profit-driven orientation that permeates our culture. Many industry experts expect
            that competition for non-prime loans will remain intense in the months ahead.
24          We have no doubt that your company is up to the challenge of this competitive
            marketplace.
25
                                             *      *       *
26
            To continue to excel in 2006, Accredited intends to further strengthen those
27          primary factors that distinguish us from others, notably our commitment to
            manage for profit, the quality of our portfolio, and our ability to diversify loan
28          originations, financing and dispositions.

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 1                                       *       *      *

 2      Managing Through Turbulent Waters
 3      Accredited’s focus on profitability will be the primary driver as we navigate
        through the challenges and uncertainties and capitalize on the opportunities
 4      emerging from any turmoil in the market.

 5      We continue to renounce the push for volume over margin.

 6                                       *       *      *

 7      Over the past year, we have introduced or augmented such vehicles as our pre-
        qualification engine, automated underwriting engine, broker portal, paperless
 8      credit files, and a host of other innovations designed to improve management
        reporting and follow-up, integrate vendor services, and expedite the loan
 9      documentation process.

10      All of these measures sharpen our focus on profitability and help distinguish us
        from the competition. Our approach is to continue to strive for steady incremental
11      gain, to stick with the fundamental profit-making drivers of our business in the
        face of competitive and industry challenges, and to advance – deliberately and
12      strategically – one step at a time.

13      Ensuring Portfolio Quality
14      The quality of the portfolio is another focus at Accredited that will continue to
        differentiate us.
15
        Unlike other mortgage lenders, Accredited’s Director of Operations is responsible
16      for both loan underwriting and loan collection. In other words, the same person
        that evaluates the risk of a potential loan is also responsible for dealing with the
17      consequences of underwriting decisions once the loan is closed and payments are
        due.
18
        This unique approach enables us to constantly track the factors that impact
19      portfolio quality, maintain an “early warning system” to spot problems in the
        portfolio, and implement the changes necessary to fix those problems in order
20      to maintain superior portfolio quality.
21      We also employ a double underwriting process that includes an appraisal review
        for every loan made at Accredited. . . .
22
        Finally, up and down the line at Accredited, loan profitability drives
23      accountability. Nearly all of our incentive systems are based on team, branch,
        region, or division profitability. Defective loans that are not sold at appropriate
24      prices, or that become delinquent, impact the employees responsible for making
        them. This tends to focus the entire team – from sales people to managers to
25      support staff – on evaluating potential borrowers in terms of making profitable,
        quality loans.
26
        A host of measurements reflect this emphasis on quality. Most importantly, our
27      2005 delinquency and loss rates of 2.47% and 0.27% respectively, are among the
        lowest reported in our industry, and our borrower credit scores last year averaged
28      639.

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 1          Facing Challenges With Confidence
 2          At Accredited, we are as fit and ready as ever to meet whatever terrain lies ahead.

 3          We have spent 15 years developing the underlying platforms that make us
            different from many of our competitors. These differentiating strengths give us
 4          great confidence that we will continue to perform and grow, even in the face of a
            more challenging mortgage lending environment.
 5
            Unlike most of our peers, our company chose not to become an REIT. We were
 6          unconvinced the associated impact on liquidity would be worth the price. Today,
            with the highest equity and liquidity in our history, we are not only well
 7          positioned to face the future, but to potentially take advantage of opportunities
            that present themselves during challenging times.
 8
            207.    Defendants’ letter to shareholders was misleading. Defendants falsely sought to
 9
     “distinguish” Accredited from others in the sub-prime market on the basis of the credit quality of
10
     Accredited’s loans. Defendants falsely stated Accredited utilized a “unique approach” that was
11
     “unlike other mortgage lenders” and that Accredited would “continue to renounce the push for
12
     volume” and was “ensuring portfolio quality” by employing multiple safeguards and “constantly
13
     track[ing] factors that impact portfolio quality.” In truth, defendants were causing the Company
14
     to sacrifice credit quality to maintain a high volume of loan origination even if it meant making
15
     extraordinary exceptions to the Company’s underwriting policies (as set forth in Section II.D.3.).
16
     In addition, the letter to shareholders was misleading in that it strongly reassured investors that
17
     the Company was well prepared to handle a downturn in the market for the Company’s services.
18
     Defendants falsely stated the Company was “as fit and ready as ever to meet whatever terrain lies
19
     ahead” as a result of the Company’s “highest equity and liquidity in [its] history.” In truth, the
20
     Company’s origination of poor-quality loans and failure to take proper reserves caused the
21
     Company to be extremely vulnerable to a liquidity crunch, as occurred in 2007 resulting in the
22
     Company’s near total collapse (as set forth in Section II.D.5.).
23
            208.    On March 28, 2006, Accredited announced its REIT subsidiary securitized $1
24
     billion of residential mortgages.
25
            209.    On May 2, 2006, the Company issued a press release entitled “Accredited Reports
26
     1Q 2006 Results; Net Income up 15% in 1Q 2006; Net Cost to Originate down 19%; Loans On-
27
     Balance Sheet up 30%; Originations up 11%.” The press release stated in part:
28

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 1      Accredited Home Lenders Holding Co., a nationwide mortgage company
        specializing in non-prime residential mortgage loans, today announced results for
 2      the quarter ended March 31, 2006.

 3      Net income for the quarter ended March 31, 2006 was $35.8 million, or $1.61
        per share on a fully-diluted basis, an increase of 14.5% over net income of
 4      $31.3 million for the comparable period in 2005. Total net revenues for the
        quarter increased by 15.2% to $141.7 million from $123.0 million for the
 5      comparable period in 2005.
 6      Chairman and CEO James Konrath said, “Our company delivered another solid
        quarter of earnings and cost discipline, along with an increase in loan
 7      originations and portfolio growth. These results were accomplished during a
        quarter with the anticipated seasonally softer origination volume and a number of
 8      competitors lowering interest rates to borrowers while the cost of money was
        increasing. Continued healthy demand for non-prime loans was again evident by
 9      our growth in origination volume when measured against the same period in
        2005, as well as the strong volume during the last month of the quarter.”
10
        Mr. Konrath added, “We are also pleased with the growth and performance of our
11      portfolio in the first quarter. Accredited continues to achieve superior executions
        on its securitizations, including a first quarter transaction with some of the tightest
12      spreads in our history, and portfolio performance results that continue to outpace
        both the industry and our forecasts. All of this underscores our continued
13      confidence that our profit-based business model, diversification in all facets of our
        business, and best-in-class employees will drive profitability for the remainder of
14      2006 and beyond.”

15                                        *       *       *

16      Loan Originations

17      The company originated $3.6 billion of mortgage loans for the quarter ended
        March 31, 2006, compared to $3.2 billion of mortgage loan originations in 1Q
18      2005, an increase of 11.1%.

19                                        *       *       *

20      Portfolio Performance and Loan Servicing

21      The company’s servicing portfolio, including $81.8 million of liquidating off-
        balance sheet securitizations, totaled $9.6 billion at March 31, 2006. The serviced
22      portfolio increased 28.5% from $7.5 billion at March 31, 2005. This was
        primarily due to the company’s quarterly securitization program. Delinquent loans
23      (30 or more days past due, including foreclosures and real estate owned) were
        2.85% of the serviced portfolio at March 31,2006, compared to 2.47% at
24      December 31,2005 and 1.72% at March 31, 2005. Delinquency levels remain
        within management’s expectations and continue to be substantially below
25      published industry averages.
26                                        *       *       *

27

28

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 1          Earnings Guidance for 2006

 2          For the total year 2006, the company reaffirms its previous earnings guidance of
            $7.70-$8.00 per share. This forecast for the balance of the year, as well as the
 3          second quarter, assumes:
 4          •      Continued growth in origination volume

 5          •      Additional reductions in the cost to originate

 6          •      Improvement in the spread of interest rates to borrowers over the cost of
                   funds from current market place levels
 7
            •      An increase in net premium received in whole loan sales from current
 8                 market levels

 9          210.   After issuing the press release on May 2, Accredited hosted a conference call for

10   investors and analysts at which defendants continued to make false and misleading statements.

11   The defendants participating in the conference call included Konrath, Lydon, Marvin and

12   Buchanan, all of whom acquiesced to each of the other defendants’ false and misleading

13   statements.

14          211.    During the conference call, defendant Konrath stated: “As anticipated,

15   delinquency did increase in the quarter. But I would point out it has moved up from a very low

16   base, and by historical standards, for comparison with other industry participants, delinquency

17   numbers and loss numbers remain extremely low.”

18          212.   Also during the conference call, defendant Lydon responded to a question from

19   analyst Robert Napoli concerning the credit quality of the Company’s loan portfolio by

20   reassuring him and the market generally that delinquencies were not problematic, and that the

21   Company was closely monitoring the issue and was as committed as ever to maintaining credit

22   quality: “We’re not alarmed by the delinquencies. I would tell you this -- that we spent a whole
23   lot of time nosing in on it, and making sure that we have got our arms around the details and
24   we’re making adjustments -- all of the things that we have done for years. That’s about all that
25   I can leave you with is -- [we] can’t give you specific numbers. We don’t think it’s anything to
26   be overly concerned with.”
27          213.   Defendants’ statements to the marketplace in ¶¶209-212 were false and

28   misleading for the reasons set forth in Section II.D. As set forth in greater detail in Section

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 1   II.D.4., the Company violated GAAP by reporting net income for the quarter ended March 31,

 2   2006 was $35.8 million, or $1.61 per share. That number was artificially inflated. Defendants

 3   manipulated the Company’s ALL by at least $23.06 million in the quarter (with a cumulative

 4   effect of $82.6 million). See Section II.D.4.a. The net income number was also artificially

 5   inflated because defendants manipulated the Company’s Repurchases Reserve and REO

 6   Reserves by not increasing those reserves to take into account increasing violations of the

 7   Company’s underwriting policies. See Sections II.D.4.b. and II.D.4.c. Furthermore, defendants

 8   failed to disclose the Company had deviated substantially from its underwriting policies to drive

 9   up loan volume, as set forth in Section II.D.3., which was a material omission which made their

10   statements false and misleading. And, defendant Lydon’s assurances that investors need not be

11   “alarmed” or “overly concerned” about the Company’s growing delinquencies were false and/or

12   misleading in light of the true facts then known to defendants as set forth in Section II.D.

13          214.    Analysts and the market did not react strongly to defendants’ false and misleading

14   statements in ¶¶209-212, as the Company’s financial results were primarily in line with

15   expectations and prior statements to the marketplace about the Company’s conservative lending

16   practices. However, had defendants not falsified the Company’s financial results and pumped up

17   loan volume by disregarding the Company’s underwriting policies, then the Company’s stock

18   price would have declined.

19          215.    On May 5, 2006, Fitch Ratings issued a press release announcing it had upgraded

20   Accredited’s residential primary servicer rating from a 3 to a 3+. Fitch noted Accredited had

21   “established loan administration policies and procedures” as a basis for the upgrade. Fitch also

22   commented on the Company putting a “greater emphasis on front-end delinquencies” and that it

23   “created a dedicated early intervention unit to focus on first payment defaults.”          In truth,

24   defendants’ false and misleading statements concealing the Company’s true financial condition

25   and creditworthiness, which was much more precarious than the Fitch rating reflected for the

26   reasons set forth in Section II.D.

27          216.    On May 10, 2006, the Company filed its Form 10-Q for the first quarter of 2005,

28   which included the same false and misleading financial results previously reported to investors

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 1   on May 2, 2006. The Form 10-Q also falsely stated that the Company was “in compliance with

 2   all covenant requirements for each of the [Company’s credit] facilities.”

 3            217.   The Form 10-Q also included certifications by defendants Konrath and Buchanan

 4   attesting to the accuracy of the Company’s financial statements and the adequacy of the

 5   Company’s internal controls over financial reporting. The certifications, attached hereto in full

 6   as Exhibits “E” and “F,” were substantially identical and both are similar to the certification

 7   included herein at Paragraph 181.

 8            218.   The Form 10-Q including the certifications was false and misleading for the

 9   reasons detailed in Section II.D.

10            219.   On May 25, 2006, Accredited announced it would acquire Aames Investment

11   Corporation, another sub-prime lender in a deal valued at approximately $340 million. Aames

12   shareholders received approximately 32% of the purchase price in cash and 68% in Accredited

13   stock.

14            220.   After announcing the acquisition, Accredited hosted a conference call for

15   investors and analysts at which defendants made a number of false and misleading statements.

16   The defendants participating in the conference call included Konrath, Lydon, Marvin and

17   Buchanan, all of whom acquiesced to each of the other defendants’ false and misleading

18   statements.

19            221.   During the conference call, defendant Konrath falsely and/or misleadingly stated,

20   among other things:

21            I’m extremely pleased and excited to announce that Accredited Home Lenders
              will acquire Aames Investment Corporation in a merger transaction. We believe
22            this is truly a win-win situation for both shareholders and employees of both
              organizations.
23
              This merger will immediately increase our origination capacity, especially in the
24            retail channel. Aames’ retail channel has shown strong, disciplined growth over
              the past several years. In this regard, we look forward to having the two
25            managers of that – or the senior management group of that team join us here at
              Accredited.
26
              There are a host of other synergies that will result from this combination,
27            including significant cost reductions throughout the combined organizations.

28                                            *      *       *

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 1          Accredited has a strong and deep management team. It has grown a profitable
            wholesale channel. On the retail side, we have 45 branches that are also
 2          exceptionally profitable at this point in time. Throughout the organization, we
            have a profit culture, and many of you have heard us speak to it in the past. We
 3          are the low-cost leader -- of or we are the cost leader of companies that are
            reporting on a public basis and we also have excellent credit quality. That shows
 4          up not only in a portfolio with the excellent results of that portfolio but also in our
            loan sales and the appetite for our product.
 5
                                              *       *       *
 6
            So, in summary, we see this as a strategic consolidation in the sector. And as Jay
 7          said, it is the first in the sector, and we would not be surprised if there were not
            others to follow. It will be accretive in 2007. We believe it creates exceptional
 8          shareholder value on both ends of the equation, both the Aames and the
            Accredited shareholders. There are significant costs and operational synergies.
 9
            222.    Also, defendant Lydon falsely and/or misleadingly stated during the conference
10
     call, among other things:
11
            [W]e’re fairly sensitive to loan quality, and our ‘05 vintage delinquencies were
12          running ahead of where our ‘02, ‘03 and ‘04 vintages were. So that has caused us
            in the last five or six months to start nosing in on that topic of loan quality. And
13          so we’ve been – I think I told you on a call recently that if you go back to
            December and you start talking about what was going on with the secondary
14          market, everybody was saying that it was just a price issue. It was my view that it
            wasn’t just a price issue.
15
                                              *       *       *
16
            But we still see our competitors out there. So I fear that there’s some of our
17          brethren out there trying to get their volume numbers by loosening their credit
            standards. But as I said, and we’re playing close attention to the credit side, so
18          I don’t want to claim that we’re lily-white on this topic, what I am kind of
            putting forth to all of you is that we’re tuned into the topic and we’re managing
19          it.
20          And by the way, we think that our reserves are more than adequate to cover any
            additional losses. Of course, you, I think, know that as well.
21
            223.    Defendants’ false and misleading statements had their desired effect. Analysts
22
     covering Accredited were very positive on the announced acquisition, repeating and further
23
     disseminating many of defendants’ misleading statements. For example, a May 30, 2006 analyst
24
     report issued by Roth Capital Markets stated:
25
            A strong competitor gets stronger; Lend to acquire AIC; reiterate Buy rating
26
                                              *       *       *
27
            We believe the terms of the proposed acquisition of AIC by LEND are very
28          attractive – to shareholders of both companies

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 1                                           *       *      *

 2          Finally, and perhaps most important – especially to Accredited – in addition to
            sharing a similar credit regime, both companies embrace a certain “profit
 3          culture”. From what we could gather, this was particularly true of Aames’ retail
            origination platform. As we have discussed at length in our previous reports, a
 4          “profit culture” is one in which individuals are rewarded on the basis of their
            contribution to the firm’s overall profitability and not necessarily sheer loan
 5          volume or some other isolated operation performance metric.
 6                                           *       *      *

 7          In summary, we think those industry participants that will not only survive, but
            prosper, in the noncomforming mortgage space are those that can attain
 8          significant economies of scale, drive the marginal cost of producing a loan toward
            zero and maintain the highest quality credit standards. We always felt
 9          Accredited was well on the way to achieving these goals. We now believe, in the
            wake of the proposed AIC transaction, Accredited will get there sooner. In
10          short, a good story just got better. Taking this conclusion into consideration along
            with our new price target of $65 (see Valuation) – representing a potential return
11          of 17% from the levels at which LEND is not trading – we are reiterating our Buy
            rating on Lend shares.
12
            224.    Friedman, Billings, Ramsey also issued a positive analyst report commenting on
13
     the proposed merger and repeating defendants’ false and misleading statements. The May 26,
14
     2006 report upgraded Friedman, Billings, Ramsey’s rating on Accredited stock to Outperform
15
     and increased the price target to $63 from $60. The report did not disclose that Friedman,
16
     Billings, Ramsey owned shares of Aames at the time it issued the analyst report. According to
17
     Aames’s and Friedman, Billings, Ramsey’s SEC filings, Friedman, Billings, Ramsey was at that
18
     time the second largest stockholder in Aames – owning 4.7 million shares of Aames equivalent
19
     to 7.6% of the outstanding stock.
20
            225.    Defendants’ statements to the marketplace in ¶¶220-224 were false and
21
     misleading for the reasons set forth in Section II.D. As set forth in greater detail in Section
22
     II.D.3., defendants failed to disclose the Company had deviated substantially from its
23
     underwriting policies to drive up loan volume, which was a material omission which made their
24
     statements concerning the Company’s focus on credit quality false and misleading. Moreover,
25
     defendants violated GAAP by manipulating the Company’s ALL (see Section II.D.4.a.), REO
26
     Reserve (see Section II.D.4.b.), and Repurchases Reserve (see Section II.D.4.c.), and it was
27
     therefore misleading for defendant Lydon to state “we think that our reserves are more than
28
     adequate to cover any additional losses.”
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 1          226.    Upon announcement of the acquisition and after defendants’ false and misleading

 2   statements, Accredited’s stock price increased from a close on May 24, 2006 at $51.94 to a close

 3   on May 26, 2006 at $55.58.

 4          227.    On or shortly before May 31, 2006, defendant Lydon spoke to investors at a

 5   conference call hosted by Friedman, Billings, Ramsey, at which he assured investors that credit

 6   quality of Accredited’s loan portfolio was not a problem. Lydon did not disclose the true facts

 7   then known to him, that Accredited was having to make multiple exceptions to its underwriting

 8   policies to drive up volume. Friedman, Billings, Ramsey issued an analyst report on May 31

 9   repeating defendant Lydon’s false statements and provided the following summary of Lydon’s

10   comments:

11          In our latest installment of “Financially Speaking” conference call series, we
            examined current credit trends within the mortgage industry with guest speakers:
12          Joe Lydon, chief operating officer of Accredited Home Lenders (LEND), and
            Curt Culver, chairman and chief executive officer of MGIC Investment Corp.,
13          (MTG). We came away from that conference call with added confidence that
            credit losses remain within historical expectations and do not pose an immediate
14          threat to the companies that we cover or the industry generally, as long as
            employment trends remain strong.
15
            228.    On June 29, 2006, analyst Scott Valentin at Friedman, Billings, Ramsey,
16
     published a report repeating false and misleading statements made by defendants to investors.
17
     The report stated, in part:
18
            We recently accompanied senior management to European investor meetings. In
19          summary, while investors remain highly concerned by both the state of the U.S.
            housing market and consumer, it appears that relatively stable subprime market
20          conditions and strong execution by LEND are producing improved profitability.
            Origination volumes continue to increase on a YOY basis; both whole loan
21          premiums and cost to originate have improved from 1Q06 levels; and credit
            quality continues to perform better than expected. While conditions in the
22          subprime sector remain challenging, we believe LEND remains the best
            positioned company in our coverage universe by virtue of its profitable
23          mortgage banking platform, strong credit performance, and excess liquidity.
            Furthermore, we continue to expect the Aames acquisition will provide
24          meaningful accretion in FY07. We reiterate our Outperform rating and 12-month
            price target of $63.
25
            229.    On June 29, 2006, Accredited announced its REIT subsidiary securitized $1.05
26
     billion of residential mortgages with an additional $350 million to be delivered in July and
27
     August. Defendant Konrath commented that there was “a strong investor demand for our
28
     bonds.”
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 1             230.   Defendants’ statements to investors as reported in the June 29, 2006 analyst report

 2   and the June 29 announcement by Accredited were false and misleading, as detailed in Section

 3   II.D., in that defendants knew, but did not disclose, that the Company was no longer abiding by

 4   its own underwriting guidelines and that, as a result, credit quality was substantially reduced and

 5   that there was a grave threat investor demand for the Company’s bonds would plummet.

 6                    3.     The Marketplace Begins To Learn The Truth Concerning Accredited
                             But Defendants Continue To Make False And Misleading Statements
 7
               231.   On August 9, 2006, the Company shocked investors when it partially disclosed
 8
     the true financial condition of the Company by significantly reducing its financial projections
 9
     from previous guidance of $7.70-$8 and revealing a growing number of delinquencies that
10
     substantially impacted earnings for the quarter. The Company’s press release stated: “The
11
     company revises its full-year 2006 earnings per fully-dilutive share guidance to a range of $4.50
12
     to $5.00.” Moreover, the Company revealed delinquencies were 3.76% in the second quarter,
13
     compared to only 2.85% in the prior quarter and 2.47% in the same quarter in 2005. As a result,
14
     Accredited increased its repurchase provision to $11.8 million (a negative $0.30 impact on
15
     earnings per share), which was triple the impact from the prior year ($2.7 million, or $0.10 per
16
     share).
17
               232.   After issuing the press release on August 9, Accredited hosted a conference call
18
     for investors and analysts at which defendants provided some clarity on what caused the
19
     Company to originate a lower volume of loans in the quarter and suffer increased delinquencies
20
     that impacted earnings in the quarter and would negatively affect earnings going forward.
21
     Defendants admitted – but certainly did not disclose the full truth – that the 2005 and 2006
22
     “vintages” of loans originated by the Company were not performing as well as the 2002-2004
23
     vintages. Partially disclosing the truth, defendants said this was an expected result of their
24
     having “take[n] a little more risk.” As a result of the growing delinquencies and repurchases, the
25
     defendants admitted loan volume was down “slightly” in the quarter because the Company was
26
     now “focused on originating higher-quality loans in a competitive market.” Thus, defendants
27
     admitted that the volume gains experienced in 2005 and early 2006, upon which the Company’s
28

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 1   projections were based, were premised upon the Company relaxing its underwriting standards.

 2   Defendants, however, did not disclose that, in fact, the defendants had entirely disregarded the

 3   Company’s underwriting policies as detailed in Section II.D.3. above.

 4          233.    The market was surprised by the defendants’ sudden partial disclosure of the

 5   truth. As a result of the partial disclosures concerning the Company’s true financial condition,

 6   Accredited’s stock price dropped significantly from an opening price of $44.29 per share on

 7   August 8, 2006 to a closing price of $34.99 per share on August 9, 2006, a drop of 21%.

 8          234.    Even though the defendants partially disclosed the true financial condition of the

 9   Company, the Company’s August 9, 2006 press release was also false and misleading. The press

10   release was entitled “Accredited Reports 2Q 2006 Results; Net Income up 4% in 2Q 2006, Net

11   Cost to Originate down 22%, Loans On-Balance Sheet up 16% from 2005.” The press release

12   falsely and/or misleadingly stated, in part:

13          Accredited Home Lenders Holding Co., a mortgage company specializing in non-
            prime residential mortgage loans, today announced results for the quarter ended
14          June 30, 2006.

15          Net income for the quarter ended June 30, 2006 was $41.2 million, or $ 1.84 per
            share on a fully-diluted basis, an increase of 4.2% over net income of $39.6
16          million for the comparable period in 2005. Total net revenues for the quarter
            increased by 6.6% to $153.2 million from $143.7 million for the comparable
17          period in 2005.

18          Chairman and CEO James Konrath said, “We are pleased with profit and cost
            results in the second quarter and the first half of 2006 that presented some of the
19          most challenging market conditions in recent memory. Our unwavering
            commitment to originating profitable loans at the lowest cost continues to
20          generate margins that act as a counterweight to continuing intense price
            competition, fluctuating secondary market appetites, and higher funding costs.”
21
                                               *       *    *
22
            [T]he reserve balance on loans held for investment increased in dollars and as a
23          percentage of the principal balance outstanding from last year and the last
            quarter. The reserve rate is now 1.6%, compared to 1.4% at June 30, 2005 and
24          1.5% at March 31, 2006.
25                                             *       *    *

26          Portfolio Performance and Loan Servicing

27          The company’s servicing portfolio, including $73.5 million of liquidating off-
            balance sheet securitizations, totaled $9.5 billion at June 30, 2006. The serviced
28          portfolio increased 14.9% from $8.3 billion at June 30, 2005. This was primarily
            due, to the company’s quarterly securitization program. Delinquent loans (30 or
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 1          more days past due, including foreclosures and real estate owned) were 3.76% of
            the serviced portfolio at June 30, 2006, compared to 2.47% at December 31, 2005
 2          and 1.79% at June 30, 2005. In spite of the increase, delinquency levels remain
            within management’s expectations and continue to be substantially below
 3          published industry averages.
 4          Liquidity

 5          The company had approximately $5.2 billion in warehouse credit capacity at June
            30, 2006. At the end of June, the company had used $1.6 billion of the available
 6          capacity. The company had $316.4 million in available cash and additional
            liquidity at June 30, 2006.
 7
                                             *       *      *
 8
            Earnings Guidance for 2006
 9
            The company revises its full year 2006 earnings per fully-dilutive share
10          guidance to a range of $4.50 to $5.00. As reported in May 2006, the company
            anticipates the dilutive impact of the Aames merger on earnings per share in 2006
11          to be in the range of $1.00 to $1.35, depending on the closing date. The most
            significant items in further revising the 2006 forecast include:
12
                •   Lower than anticipated origination volume
13
                •   Net gain on whole loan sales below previous expectations The forecast for
14                  the balance of the year assumes:

15              •   Completion of the Aames acquisition in early October

16              •   Implementation of more competitive pricing in the company’s wholesale
                    platform resulting in:
17
                    •      Lower net gains on whole loan sales
18
                    •      Year-over-year volume growth
19
                    •      Steady net cost to originate
20
            235.    Also on August 9, 2006, the Company filed its Form 10-Q for the second quarter
21
     of 2006, which included the same false and misleading financial results previously reported to
22
     investors via the Company’s press release. The Form 10-Q also falsely stated that the Company
23
     was “in compliance with all covenant requirements for each of the [Company’s credit] facilities.”
24
            236.    The Form 10-Q also included certifications by defendants Konrath and Marvin
25
     attesting to the accuracy of the Company’s financial statements and the adequacy of the
26
     Company’s internal controls over financial reporting. The certifications, attached hereto in full
27
     as Exhibits “G” and “H,” were substantially identical and both are similar to the certification
28
     included herein at ¶181.
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 1          237.   After issuing the press release on August 9, Accredited hosted a conference call

 2   for investors and analysts at which defendants made a number of false and misleading statements

 3   consistent with the Company’s press release. The defendants participating in the conference call

 4   included Konrath, Lydon, Marvin and Buchanan, all of whom acquiesced to each of the other

 5   defendants’ false and misleading statements. For instance, defendant Lydon stated:

 6          In ‘05, on these earnings calls, we made it clear that we were definitely going to
            take a little more risk. Our delinquencies remain the best in the industry, so we
 7          felt that together with the delinquency and the reserves that we have in place,
            there was plenty of room for us to take a little more risk and maintain the margins.
 8          And we did that. And so now we are seeing that vintages are up. Well, that is not
            surprising. We kind of knew that that was going to take place. And nothing is at
 9          a point where it is alarming.

10          But that said, we watch our delinquencies in all of our vintages on a monthly
            basis. So we are paying attention to what is going on. And so earlier in the year,
11          when the secondary market started to tighten down and we started to see more
            repurchase activity, we said, okay, we are going to have to tighten down some of
12          the control points as well. So that has been happening now for six, seven or
            eight months.
13
            Generally speaking, it takes you about eight months or so to really get past the
14          repurchase cycle, if you will. So my sense is that we will see some repurchase
            activity in the third quarter as well. But by the fourth quarter, we will see some
15          decline in what is going on in that arena.

16          238.   Defendants’ statements to the marketplace in ¶¶234-237 were false and

17   misleading for the reasons set forth in Section II.D. As set forth in greater detail in Section

18   II.D.4., the Company violated GAAP by reporting net income for the quarter ended June 30,

19   2006 was $41.2 million, or $1.84 per share. That number was artificially inflated. Defendants

20   manipulated the Company’s ALL by at least $16.22 million in the quarter (with a cumulative

21   effect of $98.8 million) (see Section II.D.4.a.), and defendants manipulated the REO Reserve by

22   at least $8.27 million (see Section II.D.4.b.), and defendants manipulated the Company’s

23   Repurchases Reserve by at least $10.12 million (see Section II.D.4.c.). Furthermore, defendants

24   failed to disclose the Company had deviated substantially from its underwriting policies to drive

25   up loan volume, as set forth in Section II.D.3., which was a material omission which made their

26   statements false and misleading. And, as is detailed in Section II.D.3., the Company had a

27   practice of disregarding its own underwriting policies. Moreover, in August 2006, the Company

28   had not begun to tighten its lending standards “six, seven or eight months” prior. Rather, the

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 1   Company had continued to disregard its own underwriting policies in an effort to maintain

 2   volume.

 3          239.    As a result of defendants’ false and misleading statements, investors and analysts

 4   continued to be misled as to management’s purported conservatism and the true financial

 5   prospects and condition of the Company. For instance, on August 15, 2006, analyst Scott

 6   Valentin of Friedman, Billings, Ramsey reported:

 7          We are adding LEND to the FBR Top Picks list, as we believe the recent sell-off
            is overdone and current price levels offer a potentially attractive investment
 8          return. Our reasoning is supported by our tandem beliefs that LEND will
            continue to have one of the most profitable mortgage banking platforms in our
 9          coverage universe, despite the expectation of a deteriorating margin as a result of
            the strategy shift, as well as one of the most conservative management teams, in
10          our opinion.

11          240.    From mid-August to mid-October, Accredited’s stock traded generally in the

12   range of $30 to $35, bolstered by defendants’ false and misleading statements during the period

13   and the Company’s decision to buy back stock. On September 14, 2006, Accredited’s Board of

14   Directors authorized Accredited to repurchase up to 5 million shares of the Company’s stock.

15          241.    On September 27, 2006, Accredited hosted its annual investor day, which was

16   attended by and included presentations by defendants Konrath, Lydon, Marvin and Crawford,

17   each of whom acquiesced to the false and misleading statements of the other defendants. During

18   the annual investor day conference, defendants again admitted that they had let credit quality slip

19   some but defendants misleadingly and/or falsely assured investors that the Company had moved

20   quickly to “get credit back up to the levels where [defendants] felt comfortable with it.”

21   Defendants misleadingly reassured investors “the credit quality topic is first and foremost a high

22   priority for us” and explained the steps then purportedly being taken at the Company to address

23   credit quality. Defendant Lydon stated:

24          [W]e also are adjusting compensation plans across the board to put more weight
            on the credit quality topic. So as most of you know, all of our management -
25          almost all of our people are paid based on the profits in loans and so they’re -
            those profits can be impacted by higher loss rates. But just so that we get our
26          point across to our people, we’re starting to incent (sic) them more for higher
            quality loans and we’re doing that with bonus programs.
27
            242.    Defendants also falsely assured investors that these measures were working.
28
     Defendant Lydon stated: “[W]e think we’re making very good progress on this initiative and we
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 1   think that -- probably as we get in towards the end of the year we should have our arms around it

 2   in total and feel good about all of the issues around credit quality.”

 3          243.    Defendants also falsely told investors that the Company had been able to grow its

 4   business in the month of August even while placing this “high priority” on credit quality.

 5   Defendant Konrath stated: “[T]he preliminary results that we have so far is August and our

 6   August volume was up 49% over our July volume.” Similarly, defendant Lydon stated: “In

 7   August we had a pretty solid month in terms of production.”

 8          244.    Defendants also reiterated the uniqueness of the Company’s underwriting policies

 9   to assure that the Company did not undertake unnecessary risk. Defendant Crawford stated:

10          With respect to the underwriting element, and we think this continues to be fairly
            unique in the industry, we underwrite loans twice before we close them. That
11          means we have two sets of underwriters in each one of our production platforms.
            The first underwriter is typically done by all lenders and that’s the part of our
12          production group, they’re team underwriters and their job is to underwrite the
            loans, to process, to re-verify all the information, package that transaction, get it
13          ready for closing.

14          Before the loan closes however we then pass off that file to a team that sits in that
            same production center and it goes through the second underwriting process.
15          Now the second group of underwriters we refer to as our corporate underwriting
            group. And even though they reside and work with the production units they’re
16          really part of my organization structure and they report up to me.

17          These underwriters are our most experienced and on average they have about 15
            years underwriting experience and we look to that group of people as our
18          conscience just to make sure that everything was done correctly in the
            processing of that loan. That the loan as packaged and that is ready to close, has
19          been thoroughly investigated and evaluated and fits the guidelines.
20          245.     The market responded favorably to defendants’ false and misleading disclosures.

21   For instance, analyst Matthew Howlett of Fox-Pitt, Kelton Equity Research wrote:

22          LEND’s Investor Day provided three positive take aways, in our view. 1.)
            Origination volumes have picked up substantially in August, while product
23          quality has improved. 2.) LEND’s strategic initiatives (AIC, Alt A, Canada) are
            primarily on track and their contribution to earnings should increase (primarily in
24          2007). 3.) The company has taken the necessary steps to address repurchases
            (through valuation allowances and underwriting changes), while portfolio
25          credit remains well contained.
26          246.    Defendants’ statements to investors detailed in ¶¶241-245 were false and

27   misleading for the reasons detailed in Section II.D. The Company had not made “the credit

28   quality topic [ ] first and foremost a high priority” as defendants knew the Company was

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 1   constantly overriding the Company’s underwriting guidelines and overruling decisions by the

 2   Company’s underwriting staff to originate loans to persons of poor-credit quality in an effort to

 3   boost loan volume and report higher earnings. Similarly, the Company was not making “very

 4   good progress” on the issue of credit quality nor was it reasonable for defendants to say they

 5   “feel good about all the issues around credit quality” in light of the undisclosed material facts

 6   then known to defendants concerning constant overrides of the Company’s underwriting policies

 7   then taking place.     Defendants further misled investors by asserting the Company had

 8   substantially grown volume in August while putting a “high priority” on credit quality, because,

 9   among other things, according to CW5 (see ¶64) the Company changed its compensation scheme

10   for Account Executives in August 2006 such that they were compensated regardless of credit

11   quality and this caused the origination of more bad credit-quality loans.

12          247.    On October 2, 2006, Accredited announced it completed on October 1, 2006 its

13   acquisition of Aames, paying $77.6 in cash and issuing approximately 4.4 million shares of

14   common stock.

15          248.    On October 16 and October 23, 2006, the National Mortgage News published two

16   articles quoting defendant Marvin’s comments made during an analyst conference hosted by

17   investment bank Friedman, Billings, Ramsey. Marvin misleadingly reassured investors that

18   although Accredited was dealing with increased repurchases of faulty loans, the Company was

19   readily able to do so. The October 16, 2006 article, quoted Marvin in the title as follows:

20   “Buybacks Double at Accredited; The buyback problem is ‘clearly manageable. It’s under focus

21   and being dealt with on a daily basis.’” The October 23 article provided the entire quote, noting

22   Marvin stated: “‘What we see is higher repurchase activity in 2006, consistent with the industry,

23   compared to 2005, and, at Accredited, we believe it’s clearly manageable,’ said the executive.

24   ‘It’s under focus and being dealt with on a daily basis.’”

25          249.    The statements in ¶248 were false and misleading as the buyback problem

26   Accredited was then facing was material and to assert that it was “clearly manageable” without

27   disclosing the true facts known to defendants concerning the Company’s substantial deviation

28   from its underwriting policies was misleading and concealed substantial risks that threatened to

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 1   force the Company into bankruptcy and wipe out earnings, as is detailed in Section II.D.5.

 2   Moreover, as is detailed in Section II.D.4., the Company was then understating its reserves set

 3   aside to deal with repurchases, real estate owned, and delinquencies in the securitized portfolio to

 4   manipulate reported earnings, further concealing the true extent of the Company’s buyback

 5   problem.

 6           250.    Notably, the article reported that defendant Marvin admitted loan buybacks were

 7   predictable and could be expected in advance by analyzing only three “leading” indicators, all of

 8   which were then available to Accredited’s management and which further support a strong

 9   inference that defendants knew or were reckless in not knowing that the Company would be

10   forced to buy back substantial portions of its loans in 2007 causing the Company to suffer a

11   liquidity crisis:

12           Over the past few months some mortgage executives have told this newsletter
             anecdotal tales of early payment defaults caused by third-party subservicers that
13           were not properly posting loan payments. The executives declined to go on the
             record about what they heard.
14
             Mr. Marvin said there are what he called “leading” indicators of loan buybacks,
15           chief among them credit score, loan-to-value ratio and documentation.
16           He said when there is a combination of the three, “clearly, the repurchase activity
             is heightened compared to when there’s only one attribute.”
17
             251.    Only a few days after defendant Marvin reassured investors and less than a month
18
     after the Company’s investor conference, the Company was forced to lower guidance partly
19
     because of growing delinquencies and the Company’s inability to sell its loans to third-party
20
     investors at profitable rates. Before the market opened on October 19, 2006, the Company
21
     issued a press release entitled “Accredited Updates 2006 Outlook; Sets 3Q Call Date.” The press
22
     release stated in part:
23
             Oct. 19, 2006--Accredited Home Lenders Holding Co. (NASDAQ:LEND)
24           (“Accredited”) announced today it anticipates fully-diluted earnings per share for
             the year will not reach the lower end of the company’s previous 2006 guidance of
25           $4.50.

26           Increasing turbulence in the non-prime mortgage market has impacted the
             company’s ability to achieve its previous earnings guidance. The most significant
27           factors underlying this turbulence include:

28               •   Origination volume and loan submissions have not increased as much as
                     the company anticipated and continue to be adversely affected by a
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 1                  combination of pricing competition and product contraction that has been
                    prevalent in the market throughout 2006.
 2
                •   Whole loan premiums and securitization returns are under more
 3                  pressure than previously anticipated, caused a decrease in whole loan
                    investor appetite for certain products, as well as changes in credit
 4                  standards and equity requirements promulgated by the various rating
                    agencies.
 5
                •   Delinquency from production periods in 2005 and 2006 has risen above
 6                  previous expectations, which requires the company to further bolster its
                    reserves to prudently value the loan portfolio and potential exposure.
 7
            Accredited’s Chairman and CEO, James Konrath commented, “We believe the
 8          ferocity of pricing competition is due, in part, to the current wave of merger and
            acquisition activity as several non-prime mortgage originators attempt to maintain
 9          production levels to become or remain attractive to potential investors.”

10          Mr. Konrath added, “We intend to capitalize on the fundamental strengths of the
            company -- a deeply experienced management team, diversification in all
11          operational areas, and a profit culture driven to all levels of the company -- as we
            navigate through the current turbulent cycle in the non-prime mortgage industry.”
12
            252.    The marketplace was surprised by defendants’ revelations. For example, analyst
13
     Scott Valentin at Friedman, Billings, Ramsey issued a report on Accredited downgrading the
14
     stock as a result of the defendants’ disclosures.         The report noted concerns about rising
15
     delinquencies and the fact that Accredited’s management had “lost credibility”:
16
            Before the market open on October 19, LEND announced it will not reach the
17          lower end of previous FY06 EPS guidance of $4.50. The lowered expectations
            were based on a trifecta of concerns: lower origination volumes, lower whole-
18          loan premiums, and higher than expected delinquencies. . . . [W]e believe
            management has lost credibility; in order for investors to remain comfortable
19          owning a subprime mortgage company, management credibility is paramount.
            Reflecting the more difficult operating environment, we are reducing our FY06
20          EPS estimate from $4.59 to $4.17 and our FY07 EPS from $5.41 to $4.29. As
            such, we are downgrading shares of LEND from Outperform to Market Perform
21          and lowering our price target from $42 to $35, which equates to 8x our FY07 EPS
            estimate and approximately 1.1x book value.
22
            253.    Other analysts also believed management had “lost credibility.” On October 24,
23
     2006, Stifel Nicolaus issued an analyst report stating:
24
            Last week, LEND preannounced 2006 EPS projections below its prior guidance
25          of $4.50-$5.00. Our 2006 estimate was $4.70 and consensus was $4.84.

26          Mgmt attributed the miss to 3 factors:

27          •       Origination volume below expectations due to price competition and
                    “product contraction” (i.e. 80/20 combo loans)
28

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 1          •      Lower gain-on-sale margins due to further reduced appetite for lower
                   quality loans and increased rating agency conservatism
 2
            •      Poor delinquency trends in 2005 and 2006 originations that necessitated
 3                 loss reserve building

 4          In our view, these are the three most critical profit “and valuation” drivers in
            subprime mortgage stocks.
 5
            What’s worse, we believe mgmt credibility is now severely questioned as LEND
 6          held an upbeat investor day only three weeks ago, the last week of 3Q06.
            Although mgmt indicated that conditions have deteriorated significantly since that
 7          meeting, it will likely be challenged to rebuild its reputation.
 8          254.   Similarly, on October 25, 2006, SunTrust Robinson Humphrey issued a report

 9   stating: “The company has a credibility issue since this news follows a recent investor day

10   where the company communicated a more stable secondary market and improving 3Q06

11   volumes.”

12          255.   Others in the marketplace viewed with incredulity defendants’ assertion that

13   market competition required Accredited to lower estimates. In an article published on October

14   20, 2006, titled “Accredited: Deal Fervor is Fueling a Loan-Price War,” the American Banker

15   reported:

16          Analysts were not convinced that heavier competition was entirely to blame for
            Accredited’s troubles. “So much of volume comes from big guys, it’s hard to see
17          if it affects pricing to that extent,” said Bose George of Keefe, Bruyette & Woods
            Inc.
18
            Accredited had already revised its full-year guidance in August when it reported
19          modest gains in second-quarter earnings, and it said during an investor day last
            month that it was optimistic despite tighter margins and higher delinquencies.
20          Analysts said the company’s rapidly changing outlook could damage its
            reputation.
21
            “People start questioning credibility,” Mr. George said. “This management team
22          has always been considered the best in the industry, so it comes as somewhat of a
            surprise.”
23
            256.   As a result of these partial disclosures concerning the Company’s true financial
24
     condition, Accredited’s stock price dropped significantly from a close of $34.20 on October 18,
25
     2006 to a close of $30.45 on October 19, 2006.
26
            257.   On November 6, 2006, the Company issued a press release entitled “Accredited
27
     Reports 3Q Results.” The Company reported: “Net income for the quarter ended September
28

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 1   30, 2006 was $18.4 million, or $0.83 per share on a fully-diluted basis, down from $41.3
 2   million for the comparable period in 2005.”
 3          258.    The November 6, 2006 press release was false and misleading for the reasons set

 4   forth in Section II.D. As set forth in greater detail in Section II.D.4., the Company violated

 5   GAAP by reporting net income for the quarter ended September 30, 2006 was $18.4 million, or

 6   $0.83 per share.      That number was artificially inflated.    Defendants had manipulated the

 7   Company’s ALL by at least $94.47 million in the quarter ($193.29 million on a cumulative

 8   basis) (see Section II.D.4.a.), and manipulated the REO Reserve by at least $2.34 million ($10.61

 9   million on a cumulative basis) (see Section II.D.4.b.) and manipulated the Company’s

10   Repurchases Reserve by at least $2.71 million ($12.83 million on a cumulative basis) (see

11   Section II.D.4.c.).    Indeed, adjusting for these manipulations and the effective tax rate, the

12   Company’s actual net income reflected the Company lost at least $61.34 million. See Section

13   II.D.4.d. Furthermore, defendants failed to disclose the Company had deviated substantially

14   from its underwriting policies to drive up loan volume, as set forth in Section II.D.3., which was

15   a material omission which made their statements false and misleading.

16          259.    Notably, the earnings release revealed that the Company’s number of

17   “[d]elinquent loans (30 or more days past due, including foreclosures and real estate owned)

18   comprised 5.44% of the serviced portfolio at September 30, 2006, compared to 2.47% at

19   December 31, 2005 and 1.95% at September 30, 2005.” This substantial increase suggested to

20   investors underlying problems with Accredited’s business, but the Company also issued

21   favorable false and misleading statements at the same time it made this partial disclosure.

22          260.    On November 6, 2006, the defendants falsely reassured investors and analysts

23   during the Company’s conference call to discuss the third quarter results. The conference call

24   was attended by defendants Marvin, Konrath, Lydon and Buchanan, all of whom acquiesced to

25   the statements made by the other defendants. Defendant Konrath falsely reassured investors that

26   the Company was using strict underwriting guidelines to reduce repurchase obligations, that the

27   Company had taken out adequate reserves for such obligations, and it was in excellent financial

28   condition without any liquidity problems:

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 1          On slide 14, we show the trend in repurchase activity at Accredited since the first
            quarter of 2005. We have seen a significant increase in this activity during the
 2          most recent two quarters. As reported previously, repurchases have increased as a
            result of higher early payment defaults and whole loan investors focusing on
 3          repurchase clauses in sales agreements. We expect this upward industry trend to
            continue in the near term, but we believe the significant reduction in the
 4          origination of higher-risk products, as well as changes in our underwriting
            guidelines and processes, will mitigate this trend during the first half of 2007.
 5
            As shown on slide 15, we have substantially increased our reserve for
 6          repurchases in recognition of this continued trend. This reserve is designed to
            cover the losses on future loan repurchases.
 7
                                             *       *      *
 8
            On slide 17 we show some of the changes we have made to reduce the repurchase
 9          activity. The most significant change has been the revision to our product
            guideline. There has been a significant reduction in the origination of higher-risk
10          loans, especially on high-LTV products. While this is the most prominent change,
            there have been many other product changes as we continually analyze the
11          attributes of loans with early payment defaults. This analysis of EPD has also
            served as the basis for us to refocus our underwriters and help them recognize
12          those loans that have a risk of early default in this rapidly-changing real estate
            market.
13
                                             *       *      *
14
            The Company is in excellent financial condition, our sources of funding are
15          strong and diversified in all aspects of the business, and we have strong liquidity.
            ...
16
            We have increased a strong reserve position on one of the best-performing
17          portfolios in the industry. We are confident in our ability to manage through this
            cycle and take advantage of any opportunities it may present. We are also
18          confident that we will be in an excellent position to again profitably grow our
            business as the current industry turmoil subsides
19
            261.   On November 9, 2006, the Company filed its Form 10-Q for the third quarter of
20
     2006, which included the same false and misleading financial results previously reported to
21
     investors via the Company’s press release. The Form 10-Q also falsely stated that the Company
22
     was “in compliance with all covenant requirements for each of the [Company’s credit] facilities.”
23
            262.   The Form 10-Q also included certifications by defendants Konrath and Marvin
24
     attesting to the accuracy of the Company’s financial statements and the adequacy of the
25
     Company’s internal controls over financial reporting. The certifications, attached hereto in full
26
     as Exhibits “I” and “J,” were substantially identical and both are similar to the certification
27
     included herein at ¶181.
28

                                                                          CORRECTED CONSOLIDATED
                                                  -85-                     CLASS ACTION COMPLAINT
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 1          263.       Defendants’ statements to investors detailed in ¶¶260-262 were false and

 2   misleading for the reasons detailed in Section II.D. For instance, the Company’s net income was

 3   artificially inflated in violation of GAAP as the defendants had manipulated the Company’s

 4   Repurchases Reserve, REO Reserves and ALL. See Sections II.D.4. Defendants had not made

 5   “changes in … underwriting guidelines and processes” that might be expected to reduce

 6   delinquencies and defaults in the first half of 2007. The Company had not “substantially

 7   increased our reserve for repurchases … designed to cover the losses on future loan repurchases”

 8   as the Company’s Repurchases Reserve was proportionately lower than it had been past quarters

 9   and the Company knew repurchases were going to be increasing greatly in the future as a result

10   of the defendants’ scheme to drive up loan volume. See Section II.D.3. The Company was not

11   “in excellent financial condition” and did not have “strong liquidity” in light of the fact the

12   defendants were manipulating the Company’s financial statements and the Company faced a

13   potentially debilitating liquidity crisis as set forth in Section II.D.5. The Company did not have

14   “a strong reserve position” as the reserves were inadequate and in violation of GAAP. See

15   Section II.D.4.

16          264.       On January 11, 2007, the Company completed a $56 million offering of trust

17   preferred securities through its subsidiary, Accredited Preferred Securities Trust I. The trust

18   preferred securities are to bear interest at a fixed rate of 9.01% until January 30, 2012,

19   whereupon the rate floats at three-month LIBOR plus 3.95% thereafter until their maturity in

20   January 2037, unless earlier redeemed.

21          265.       On February 14, 2007, the Company issued a press release entitled “Accredited

22   Reports 2006 Results.” The Company reported net loss for the quarter ended December 31,

23   2006 was ($37.8) million, or ($1.49) per share on a fully-diluted basis, which income amount

24   was false and misleading and artificially inflated for the reasons set forth in Section II.D.

25   Defendants had manipulated the Company’s ALL by at least $402.16 million in the quarter

26   ($595.455 million on a cumulative basis) (see Section II.D.4.a.), and manipulated the REO

27   Reserve by at least $8.52 million ($19.125 million on a cumulative basis) (see Section II.D.4.b.)

28   and manipulated the Company’s Repurchases Reserve by at least $4.25 million ($17.075 million

                                                                         CORRECTED CONSOLIDATED
                                                  -86-                    CLASS ACTION COMPLAINT
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 1   on a cumulative basis) (see Section II.D.4.c.). Indeed, adjusting for these manipulations and the

 2   effective tax rate, the Company’s actual net income reflected the Company lost at least $315.81

 3   million. See Section II.D.4.d. Moreover, defendants improperly accounted for the Company’s

 4   acquisition of Aames, which the defendants have admitted, causing the Company’s reported

 5   income to be artificially inflated by $142.4 million (which is in addition to the manipulation of

 6   income resulting from understated reserves). Because of the improper accounting for the Aames

 7   acquisition, and failure to write-down the goodwill related thereto, the Company’s financial

 8   results were also false and misleading in that the Company’s reported assets on its balance sheet

 9   were overstated by $63 million. See Section II.D.4.e.

10          266.    While the February 14, 2007 press release was false and misleading, defendants

11   did disclose that the Company’s financial results in the fourth quarter of 2006 were substantially

12   lower than the prior year fourth quarter and substantially below analyst expectations. The

13   earnings miss was in large part because delinquent loans had grown to 7.18% of the Company’s

14   loan portfolio (which number excluded loans made by Aames) versus only 2.47% in the prior

15   year – an increase in delinquencies of 290%. With delinquencies from the Aames loans, the

16   delinquency rate increased to 8.26%. As a result of the Company’s growing delinquencies,

17   Accredited had been forced to implement and/or re-implement underwriting policies to address

18   the large number of loan delinquencies being experienced by the Company. The Company’s

19   press release stated:

20          The company originated $3.9 billion of mortgage loans for the quarter ended 4Q
            2006, compared to $4.7 billion of mortgage loan originations in 4Q 2005, a
21          decrease of 18%. Wholesale and retail originations for the quarter represented
            77% and 23% of total loan production, respectively, reflecting the impact of the
22          merger on the retail channel.

23          Volume from the wholesale channel decreased from $4.2 billion in 4Q 2005 to
            $3.0 billion in 4Q 2006, a decline of 29.6%. The primary reasons for the lower
24          volume in the wholesale channel were continuation of credit quality initiatives,
            and pricing and product competition in the wholesale market.
25
                                             *       *       *
26
            Delinquent loans (30 or more days past due, including foreclosures and real estate
27          owned) comprised 7.18% (excluding Aames loans remaining in the portfolio) of
            the serviced portfolio at December 31, 2006, compared to 5.45% at September 30,
28          2006.

                                                                         CORRECTED CONSOLIDATED
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 1                                           *       *      *

 2          The decrease in total net revenues from 4Q 2005 to 4Q 2006 is primarily the
            result of lower gain on sale premiums on loans sold, higher provisions for
 3          repurchases and lower net interest income. Net interest income after provision
            declined primarily due to lower spreads and increasing provision for losses on
 4          loans held for investment and REO.

 5          267.    The Company also disclosed that loan repurchases had grown to $90 million in

 6   the 4th quarter of 2006 – which was five times the amount of loans repurchased in the fourth

 7   quarter of 2005.

 8          268.    Analysts and the media were surprised by defendants’ revelations. For example,

 9   on February 20, 2007, Fox-Pitt, Kelton issued an analyst report lowering its earnings estimates as

10   follows:

11          Weak 4Q06 leads to lower 2007 and 2008 estimates: We are lowering our 2007
            and 2008 EPS estimates to -$0.62 (from $4.30) and $3.25 (from $5.88)
12          respectively, following LEND’s 4Q06 earnings release.

13                                           *       *      *

14          In loss mitigation mode; retrenchment necessary and should improve operating
            outlook: LEND’s greater than expected 4Q06 loss was largely driven by the sharp
15          deterioration in credit (mainly pertaining to the 2006 book of business), which
            resulted in $76 million (or $1.79 p/s after tax) in total reserve build. Going
16          forward, increasing reserves along with tightening underwriting standards appears
            to be priority one for management. While these actions are likely to drive
17          operating losses for the next two quarters, we think the changes are necessary to
            cushion the balance sheet from the 2006 vintage and improve mortgage banking
18          margins through the development of a higher quality product.

19          269.    However, defendants continued to make false and misleading statements to

20   investors during the Company’s conference call, which was attended by defendants Marvin,

21   Konrath, Lydon and Buchanan. Defendant Konrath falsely stated:

22          I will now discuss many of the initiatives we have embarked upon to improve
            credit quality. It is important to understand that there are several drivers
23          associated with strong portfolio performance. Product attributes is one very
            significant driver, but the integrity of the Company’s processing and underwriting
24          process is also a second important driver. We have been making adjustments to
            both the products we offer and our processing and underwriting disciplines.
25          These efforts to begin adjusting underwriting guidelines and standards began
            in early 2006.
26
            In the second quarter, in response to what we were hearing from the whole loan
27          buyers, we began making adjustments to products with high CLTVs, products
            with low credit scores and products with less than full income documentation.
28          Additionally, particular attention was given to the layering of risk of these
            particular underwriting elements. We made significant reductions in our product
                                                                         CORRECTED CONSOLIDATED
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 1          offering, including the elimination of stated income loans to borrowers with
            FICOs less than 640 on higher CLTVs, the curtailment of first-time homebuyer
 2          programs and the dramatic reduction of combo loan products, which significantly
            cut back second mortgage production.
 3
            While curtailing the product offering, we also turned our attention to our
 4          underwriting disciplines and re-examined our routines throughout the processing
            and underwriting environment. In addition, we also bolstered oversight by adding
 5          more senior management to both the wholesale and retail channels. All
            production-level incentive plans were adjusted to reward people for excellent
 6          credit quality and penalize those with unacceptable credit quality. The feedback
            loop from our capital markets group to the front-line underwriting personnel was
 7          enhanced to improve communication and accelerate improvement measures.
            Finally, we began using a number of tools to help us better manage the quality of
 8          appraisals being used. CoreLogic’s HistoryPro is one tool we have integrated into
            our appraisal review process.
 9
            This process of eliminating products, adjusting underwriting guidelines and
10          reinforcing disciplines has been an ongoing effort for at least a year now. . . .
11          [O]ur principal focus at this point in time is on producing profitable volume, so
            the emphasis on credit quality is vital to this objective.
12
                                             *       *      *
13
            We’re confident that the many changes we have made to the curtailment of
14          products and the underwriting disciplines will result in a return to the
            repurchase levels we have enjoyed in past years.
15
            270.    Defendant Konrath also falsely assured investors that the Company was not
16
     facing a liquidity problem:
17
            I think the lead-in to your question that the liquidity was impressive at the end of
18          the year is really the key. All of the questions that we have heard here regarding
            capital markets, whole loan sales markets, et cetera, all speak to how good is
19          liquidity. We’re happy with our liquidity position, and we’re also happy with the
            additional things we have been able to do, as Stu talked to the trust preferred, et
20          cetera.

21          But we think that, given the amount of turbulence and where the market is and
            where the ABX spreads are, that right now is probably the time to maintain a
22          very, very strong liquidity position, and we fully intend to do that.

23          271.    And, defendant Konrath misleadingly assured investors the Company was

24   prepared to weather problems in the sub-prime market based on its strong liquidity position and

25   quality portfolio:

26          Over the longer term, we continue to see ourselves as a company that can grow
            originations while producing those loans with some of the lowest costs to
27          originate in the industry. We also believe the depth and expertise of our
            management team, our strong balance sheet, liquidity of $345 million as of the
28          end of the year, as well as the quality of our portfolio will help us through the
            current cycle and provide expanded opportunities in the future.
                                                                          CORRECTED CONSOLIDATED
                                                  -89-                     CLASS ACTION COMPLAINT
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 1          272.    Defendants’ statements to investors detailed in ¶¶266-271 were false and

 2   misleading for the reasons detailed in Section II.D. For instance, the Company had not been

 3   “adjusting underwriting guidelines and standards [since] early 2006” in an effort “to improve

 4   credit quality” as defendant Konrath stated. Rather, the Company had continued to disregard

 5   underwriting policies and procedures in 2006 in an effort to inflate and maintain origination

 6   volume. The Company had not “bolstered oversight” or “adjusted” incentive plans to “reward

 7   people for excellent credit quality” – and certainly had not been “adjusting guidelines and

 8   reinforcing disciplines … for at least a year.” Rather, according to CW12, it wasn’t until

 9   February 2007 that Accredited finally tightened its lending guidelines and, according to CW12,

10   “it was too late by then.” Thus, it was misleading for defendant Konrath to suggest the Company

11   expected repurchase levels to return to historic rates. Defendant Konrath also misleadingly

12   represented that the Company’s “liquidity was impressive” and that the Company balance sheet

13   was “strong” and that the quality of the Company’s loan portfolio would help it through a

14   downturn in the market. In reality, the Company faced significant risks of suffering a liquidity

15   crisis as a result of defendants’ scheme to increase loan origination volume by disregarding the

16   Company’s underwriting policies. See Section II.D.5. Defendants’ statements were particularly

17   misleading in that defendants did not disclose that as of December 31, 2006, the Company’s MLI

18   90+ days delinquent as of December 31, 2006 had increased to $316.25 million from only

19   $136.84 million the quarter before and $71.36 million at the end of 2005.

20          273.    The Company’s statements on February 14, 2007 were also false and misleading

21   as the Company admitted in its Form 10-K for 2006, published after the Class Period on August

22   2, 2007, that the Company did not maintain effective internal controls:

23          As of December 31, 2006, we did not maintain effective operation of internal
            control over the application of U.S. generally accepted accounting principles
24          relating to the merger of Aames Investment Corporation, which resulted in
            material adjustments to the Company’s preliminary annual consolidated financial
25          statements for the year ended December 31, 2006. Most notable, the Company
            initially established goodwill based upon the market price of the Company’s
26          common stock on the closing date of the merger as opposed to the market price of
            the Company’s common stock on the date the transaction was announced. This
27          resulted in total goodwill initially estimated of approximately $65 million in the
            fourth quarter of 2006 instead of $142 million.
28

                                                                         CORRECTED CONSOLIDATED
                                                  -90-                    CLASS ACTION COMPLAINT
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 1           274.   As a result of defendants’ false and misleading statements in its press release and

 2   conference call, market reaction to the Company’s partial disclosures was mixed and the stock

 3   price did not react strongly to the negative news.

 4           275.   On March 2, 2007, the Company filed a Form 12b-25 with the SEC signed by

 5   defendant Marvin stating the Company would not be filing its Form 10-K for the year 2006 as

 6   required.

 7           276.   Failure to file the Company’s Form 10-K caused the Company to be in default of

 8   its warehouse covenants, which lenders supplied the Company with the necessary liquidity it

 9   needed to continue operations. As a result, market concerns about the Company’s liquidity

10   increased. At least in part because of this news, and growing suspicion among the marketplace

11   of rampant improprieties in the industry, the Company’s stock price declined from a close on

12   March 1, 2007 at $22.53 to a close at $21.70 on March 2 and a close on the next trading day,

13   March 5, at $16.06.

14           277.   On March 13, 2007, after the market closed, the Company issued a press release

15   further revealing the true financial condition of the Company, particularly the liquidity crisis it

16   was suffering under as a result of the defendants’ scheme to falsely inflate Accredited’s financial

17   results by originating risky loans. The Company also disclosed it would not be able to publish its

18   Form 10-K within the time extension it had requested from the SEC. The press release stated in

19   part:

20           Accredited Home Lenders Holding Co. (“Accredited” or “Company”) announced
             today that it is currently exploring various strategic options, including raising
21           additional capital to enhance liquidity and provide the Company with the
             flexibility to retain or sell originated loans based on an assessment of the best
22           overall return. Accredited’s available cash resources have been affected
             primarily by margin calls under its warehouse and repurchase facilities since
23           January 1, 2007, all of which have been met to date, as well as ongoing loan
             repurchases. The Company reported that it has paid approximately $190 million
24           in margin calls on its facilities since January 1, 2007. Approximately two-thirds
             of those margin calls have been received and paid since February 15, 2007.
25
                                              *       *      *
26
             [I]t is unlikely that the Company will file its Annual Report on Form 10-K by
27           March 16, 2007 as previously contemplated in its Notification of Late Filing on
             Form 12b-25 filed with the Securities and Exchange Commission on March 1,
28           2007.

                                                                          CORRECTED CONSOLIDATED
                                                   -91-                    CLASS ACTION COMPLAINT
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 1          278.    Analysts were shocked by the size of the Company’s defaults. “No one, including

 2   those of us who follow the company, expected the size of the early payment defaults that they

 3   reported,” said Richard Eckert, a senior research analyst with Roth Capital Partners.

 4          279.    On March 13, 2007, SunTrust Robinson Humphrey issued an analyst report on

 5   Accredited titled:   “On the Brink of Survival; Seeking Funding or Partner.”              The report

 6   summarized the crisis: “This morning, LEND announced that it is in a severe liquidity crisis due

 7   to margin calls and repurchase obligations. . . . With the stock trading around $4, it is difficult to

 8   determine if LEND can survive or sell itself in time.”

 9          280.    Similarly, Fox-Pitt, Kelton issued an analyst report on March 14 rating the

10   Company a sell and lowering its price target:

11          We are lowering our price target to $3 following yesterday’s announcement the
            company is pursuing liquidity driven capital raising alternatives. Our new PT is
12          based on a discounted book value estimate. We believe there is less than a 50%
            chance LEND will be successful in shoring up its liquidity base through a capital
13          raise or completing an outright sale of the company.

14          Liquidity Strained During Depressed Times: Since Jan 1, the company has
            burned through nearly $345 million in cash and available liquidity. Draining the
15          company’s cash positions has been a combination of margin calls, EPD related
            buybacks and reduced residual repo financing availability. More specifically,
16          LEND and (sic) have been forced to post $190M in conjunction with margin calls
            on their warehouse lending facilities. Given the quarter and the size of the
17          company’s warehouse inventory ($2.1B), we were surprised at the amount of the
            margin calls, which indicates that value of their loans has declined by 7-9 points,
18          based on our estimate.

19          281.    On March 13, 2007, in direct response to defendants’ disclosure of the day prior,

20   Accredited’s stock collapsed $7.43 per share to close at $3.97 per share, a one-day decline of

21   65% on volume of 41.9 million shares, 20 times the average three-month volume.

22          F.      Post-Class Period Events

23          282.    Accredited’s shares initially rebounded from their close on March 13 at $3.97;

24   however, this increase resulted from rumors that Accredited would be saved from bankruptcy by

25   being acquired.

26          283.    On March 16, 2007, Accredited announced it had agreed to sell $2.7 billion of its

27   mortgages to an undisclosed buyer at a “substantial discount” in an effort to provide the

28   Company time in dealing with its looming liquidity crisis. The press release stated: “The $2.7

                                                                            CORRECTED CONSOLIDATED
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 1   billion of loans held for sale will be sold at a substantial discount in order to alleviate recent

 2   pressures from margin calls. . . . The Company estimates that this discounted loan sale will

 3   result in a pre-tax charge of approximately $150 million.” Moreover, by the terms of the sale,

 4   $40 million of the payment was placed in a holdback reserve to satisfy early defaults. The fact

 5   that no buyer would pay the face value of the loans, let alone the typical premium to compensate

 6   the Company for its work in originating the loans, further evidences the poor credit quality of the

 7   portfolio originated by Accredited.

 8           284.   Further, on March 16, 2007, the Company announced it had received a letter from

 9   the NASDAQ Stock Market indicating the Company’s common stock was subject to delisting as

10   a result of its failure to file a timely Form 10-K with the SEC.

11           285.   On March 20, 2007 Accredited announced it had received a commitment for a

12   $200 million loan from Farallon Capital Management, LLC at an interest rate of 13% per year,

13   which also included issuance of some 3.3 million warrants to Farallon with an exercise price of

14   $10 per share. The unfavorable terms of the loan evidence Accredited’s desperation to secure

15   financing to bail itself out of its liquidity crisis. As set forth by Morningstar analyst Ryan

16   Lentell, “It’s expensive, surely. But I don’t think it’s completely ridiculous given the situation

17   the company’s in.”

18           286.   On March 27, 2007, Accredited’s auditor Grant Thornton LLP advised the

19   Company it was resigning. Accredited announced the resignation of Grant Thornton in an SEC

20   filing dated April 2, 2007. As set forth in the SEC filing, Grant Thornton had served as the

21   Company’s auditor since the firing of the Company’s prior auditor in June 2005.

22           287.   On April 3, 2007, Fox-Pitt, Kelton issued an analyst report commenting that

23   Grant Thornton’s departure was “an unprecedented move” and that Grant Thornton had “run for

24   the hills.”

25           288.   Similarly, Stifel, Nicolaus & Company issued an analyst report on April 4 stating:

26           •      The resignation of Grant Thornton without completing the 2006 audit is a
                    significant negative in our view. We expect that this will postpone
27                  reporting for several more months, putting LEND in violation of various
                    regulatory and NASDAQ requirements, and to some degree leaving
28                  aspects of its fate in the hands of others. While LEND is not yet facing

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 1                  delisting or state cease and desist orders, the continued inability to report
                    timely financials exposes it to this risk.
 2
            •       All in, we maintain our Sell rating on the shares as we believe 2007 will
 3                  be a very difficult year, and survival risk still remains. Our revised
                    estimates are ($5.88) and ($9.87) for 1Q07 and 2007, respectively.
 4
            289.    On April 9, 2007, Accredited engaged Squar, Milner, Peterson, Miranda &
 5
     Williamson, LLP (“Squar Milner”) as its independent public accountant.
 6
            290.    On May 11, 2007, Accredited filed with the SEC a Form 12b-25 signed by
 7
     defendant James A. Konrath announcing Accredited was unable to timely file its Form 10-Q for
 8
     the first quarter of 2007, but that the Company would file its Form 10-Q for the first quarter of
 9
     2007 and its Form 10-K for 2006 upon Squar Milner’s completion of its audit of Accredited.
10
            291.    The May 11, 2007 Form 12b-25 further reported certain of Accredited’s financial
11
     results and information for the first quarter. Notably, the Form 12b-25 reported that the poor
12
     quality of Accredited’s loans had caused the Company to sell its mortgage portfolio for
13
     substantially less than it had in the past and below the cost to Accredited – causing the Company
14
     to incur a substantial loss. The financial results further evidenced (1) the Company’s 2005-2006
15
     growth in origination volume resulted from disregarding underwriting guidelines and was
16
     unsustainable, and (2) the substantial deterioration of the Company’s financial condition
17
     resulting from poor-quality loans originated prior to and during the Class Period:
18
            Originations
19
            The Company originated approximately $1.9 billion of mortgage loans in the U.S.
20          and Canada during the quarter ended March 31, 2007, down 47%, from $3.6
            billion for the comparable period in the prior year.
21
            Loan Dispositions
22
            As previously announced, the Company closed a $760 million asset-backed, on-
23          balance sheet securitization on January 30, 2007 compared to a $1.0 billion
            securitization in the first quarter of 2006.
24
            During the first quarter 2007, as previously disclosed, the Company sold
25          approximately $3.5 billion in mortgage loans for cash. Of the $3.5 billion sold,
            approximately $800 million of loans were sold at a weighted average net price of
26          100.63% and $2.7 billion of loans, which included substantially all performing
            and non-performing loans in inventory on March 6, 2007, were sold at a
27          substantial discount to par value and resulted in a pre-tax charge of approximately
            $160 million. During the comparable quarter of 2006, the Company sold $3.0
28          billion in mortgage loans at a weighted average net premium to par value of
            approximately 2.10%.
                                                                          CORRECTED CONSOLIDATED
                                                  -94-                     CLASS ACTION COMPLAINT
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 1           In March 2007, the Company signed a $400 million forward sale agreement,
             priced at 100.625%, for loans to be delivered in the second quarter.
 2
             Portfolio Performance and Loan Servicing
 3
             The Company’s servicing portfolio totaled approximately $9.1 billion at March
 4           31, 2007. The serviced portfolio decreased approximately $500 million from
             approximately $9.6 billion at March 31, 2006. This was primarily due to the
 5           decline in the number and sizes of the Company’s securitizations in 2006 and
             2007. Delinquent loans (30 or more days past due, including foreclosures and
 6           real estate owned) comprised 8.96% of the serviced portfolio at March 31, 2007,
             compared to 8.26% and 2.85% at December 31, 2006 and March 31, 2006,
 7           respectively.

 8           Financial Results
 9           As previously reported, the Company’s recent performance has been and
             continues to be negatively impacted by fierce pricing competition, ongoing
10           product contraction, higher delinquencies and losses, and activities associated
             with the acquisition of Aames Investment Corporation that was effective on
11           October 1, 2006.

12                                            *      *       *

13           The Company anticipates a significant loss in the quarter ended March 31, 2007
             compared to net income of $35.8 million for the comparable period in 2006.
14           Among other items affecting the results for the quarter ended March 31, 2007,
             were the losses on loan dispositions in the first quarter, expenses associated with
15           higher delinquencies and cost restructuring initiatives discussed above. As
             previously disclosed, the Company is evaluating the recoverability of tax assets
16           and the amount of necessary valuation allowance. The Company believes that
             approximately $100 million is recoverable from taxes paid in prior years, and the
17           realization of any additional tax benefit will be dependent on future taxable
             income.
18
             292.    On May 15, 2007, the Company announced it had received a letter from the
19
     NASDAQ Stock Market indicating the Company’s common stock was subject to delisting as a
20
     result of its failure to file a timely Form 10-Q with the SEC. The May 15, 2007 deficiency letter
21
     from the NASDAQ was in addition to the deficiency letter received previously on March 16,
22
     2007.
23
             293.    On June 4, 2007, Accredited announced it had agreed to be acquired by Lone Star
24
     Fund V via a tender offer priced at $15.10 per share, valuing the Company at approximately
25
     $400 million.
26
             294.    On August 2, 2007, the Company filed its Form 10-K for 2006 with the SEC after
27
     having delayed filing for 4.5 months.        The Form 10-K made a number of disclosures
28
     substantiating Lead Plaintiff’s allegations, including among others:
                                                                            CORRECTED CONSOLIDATED
                                                  -95-                       CLASS ACTION COMPLAINT
                                                                            Case No. 3:07-cv-00488-H-RBB
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 1      •   “We recorded a net loss of $205.7 million for the year ended December 31, 2006, or
            $9.09 per diluted share, compared to net income of $155.4 million, or $7.07 per diluted
 2          share in 2005.”

 3      •   “The total provision for losses outlined below increased $116.1 million or 143%, from
            $81.4 million in 2005 to $197.4 million in 2006. This provision increase was one of the
 4          key reasons for our profit decline from 2005 to 2006 and was driven by increasing
            delinquencies in our mortgage loan portfolio.”
 5
        •   “Loans more than 30 days delinquent rose consistently during 2006, from 2.49% at
 6          December 31, 2005 to 7.18% at December 31, 2006 (excluding mortgage loans acquired
            from Aames).”
 7
        •   “The provision for LOCOM on loans held for sale increased $59.0 million, from $6.0
 8          million in 2005 to $65.0 million in 2006, and represented the largest portion of the
            increase in the total provision for losses. This provision increase was the result of
 9          increasing delinquencies in loans originated and repurchased, coupled with a sharp
            decline in secondary market prices for first and second lien non-prime mortgage loans.”
10
        •   “The provision for repurchase losses also increased $39.6 million in 2006, from $4.1
11          million in 2005 to $43.7 million in 2006. As secondary market prices declined and early
            payment defaults increased in 2006, investors began to more aggressively enforce the
12          early payment default terms and misrepresentations and warranty claims of their purchase
            and sale contracts, including those with Accredited.”
13
        •   “During the five months ended May 31, 2007, we repurchased approximately $152
14          million in mortgage loans and paid $39.2 million in cash settlements to eliminate the
            requirement to repurchase mortgage loans in the future from investors.”
15
        •   As of December 31, 2007, the Company’s MLI 90+ days delinquent had grown to
16          $316.25 million.

17      •   “As of December 31, 2006, we did not maintain effective operation of internal control
            over the application of U.S. generally accepted accounting principles relating to the
18          merger of Aames Investment Corporation, which resulted in material adjustments to the
            Company’s preliminary annual consolidated financial statements for the year ended
19          December 31, 2006. Most notable, the Company initially established goodwill based
            upon the market price of the Company’s common stock on the closing date of the merger
20          as opposed to the market price of the Company’s common stock on the date the
            transaction was announced. This resulted in total goodwill initially estimated of
21          approximately $65 million in the fourth quarter of 2006 instead of $142 million.”

22      •   “[T]he Company determined that the amount of goodwill established in the acquisition of
            Aames of approximately $142.4 million had been impaired and therefore was charged-
23          off.”

24          295.   On August 10, 2007, the Company filed a Form 12b-25 with the SEC, signed by

25   defendant Konrath, in which the Company reported it could not timely file its Form 10-Q filings

26   for the periods ending March 31, 2007 and June 30, 2007. Moreover, the Company’s Form 10-Q

27   disclosed: “Delinquent loans (30 or more days past due, including foreclosures and real estate

28

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 1   owned) comprised 11.71% of the serviced portfolio at June 30, 2007, compared to 8.26% and

 2   3.86% at December 31, 2006 and June 30, 2006, respectively.”

 3          296.    Later on August 10, 2007, Lone Star stated in a filing with the SEC that it had

 4   “informed the Chairman of the Special Committee of the Board of Directors of the Company

 5   that, in light of the drastic deterioration in the financial and operational condition of the

 6   Company, among other things, as of today, the Company would fail to satisfy the conditions to

 7   the closing of the tender offer.”

 8          297.    In response, on August 10, 2007, Accredited “announced that it believes all

 9   conditions to the closing of the pending tender offer for Accredited’s common stock will be

10   satisfied” and on August 11, 2007, Accredited filed an action in the Court of Chancery for New

11   Castle County, Delaware, seeking specific performance requiring Lone Star to complete the

12   acquisition.

13          298.    On August 20, 2007, Lone Star filed its answer to the complaint and

14   counterclaims. According to Lone Star, Accredited’s “precipitous descent into a severe liquidity

15   crisis” was attributable to the Company deviating from its underwriting policies: “Accredited

16   has amassed a large and growing pool of ‘scratch and dent’ loans that were put back to

17   Accredited because they were issued in violation on the underwriting criteria applicable to those

18   loans.” ¶30.

19          299.    Lone Star also alleged the Company had committed “violations of covenants in

20   the Company’s core credit facilities” having a material adverse effect to the Company and, along

21   with other factors specific to the Company, causing the Company’s “current financial condition

22   and liquidity crisis.” ¶¶60-62.

23          300.    Lone Star further alleges defendants continue to conceal facts concerning the

24   Company’s compliance with covenants in the Company’s credit facilities: “Accredited has not

25   provided Lone Star with requested information regarding Accredited’s current financial

26   condition and prospects, including information regarding Accredited’s compliance with the

27   terms and conditions of its credit facilities and communications between or among Accredited

28   and its creditors regarding the covenants in those credit facilities.” ¶46.

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 1          G.       Loss Causation

 2          301.     Throughout the Class Period, as detailed above, the prices of the Company’s

 3   securities were artificially inflated as a direct result of defendants’ misrepresentations and

 4   omissions regarding the Company. When the truth about the Company was partially revealed to

 5   the market beginning with the Company’s disclosure on August 9, 2006 (and leakage preceding

 6   that disclosure that resulted in the stock price decline on August 7 and August 8), the inflation

 7   that had been caused by defendants’ misrepresentations and omissions was eliminated from the

 8   price of the Company’s securities, causing significant damages to Lead Plaintiff and the other

 9   Class members. Accredited’s securities consistently reacted to information in the market place,

10   including, but not limited to, the following:

11      •   On November 1, 2005, Accredited reported misleading 3Q’05 financial results including
12          net income of $41.3 million, up from $35.9 million in 3Q’04. The stock price increased

13          7.25%.

14      •   On November 18, 2005, defendant Konrath appeared on Jim Cramer’s Mad Money. The
15          stock price closed up 6.18% on the next trading day (November 21, 2005).

16      •   On December 19, 2005, Accredited reported misleading full-year 2006 guidance of
17          $7.70-$8.00 per share. The stock price closed up 3.8%.

18      •   On March 16, 2006, Accredited filed its misleading Form 10-K with the SEC. The stock
19          price closed up 5.29%.

20      •   On May 5, 2006, Accredited was upgraded by Fitch Ratings. The stock closed up 4.03%.
21      •   On May 25, 2006, Accredited announced the acquisition of Aames Investment
22          Corporation for $340 million. Accredited closed at $55.58 on May 26, 2006 after closing

23          at $51.94 on May 24, 2006.

24      •   On August 9, 2006, the Company partially disclosed the truth concerning its growing
25          number of delinquencies and reduced its earnings projections for 2006. After declining

26          by large amounts on the two prior days, Accredited declined 17.2% after the disclosure.

27      •   On August 11, 2006, the Company was downgraded by Roth Capital. The stock dropped
28          6.7%.

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 1       •   On October 16, 2006, the Company was downgraded by Stifel Nicolaus. The stock
 2           dropped 3.9%.

 3       •   On October 19, 2006, the Company announced higher delinquency rates and lowers 2006
 4           earnings projections. Analysts reported management had “lost credibility.” The stock

 5           dropped 11% on the day.

 6       •   On January 1, 2007, Accredited sold $56 million of preferred securities to investors.
 7           Accredited common stock increased 5.4%.

 8       •   On February 8, 2007 through February 12, 2007, Accredited stock price dropped from
 9           $29 to $24.50 in anticipation of the Company’s release of 2006 financial results and as a

10           result of industry news concerning declining credit quality.

11       •   On March 2, 2007, the Company failed to file its Form 10-K with the SEC as required.
12           The stock dropped 3.68%.

13       •   On March 5, 2007, the next trading day after the Company failed to file its Form 10-K,
14           Company was downgraded by Stifel Nicolaus. The stock price dropped 26%.

15       •   On March 12, 2007, after the Company’s stock price dropped 28% on the day, the
16           Company issued a press release, after the market closed, disclosing a liquidity crisis

17           resulting from loan repurchases and margin calls on the Company’s credit facilities.

18       •   On March 13, 2007, the Company’s stock dropped over 65% in response to the
19           Company’s press release and disclosure of a severe liquidity crisis.

20           302.       The declines in the Company’s securities prices following these revelations, and

21   the resulting damages suffered by Lead Plaintiff and the other members of the Class, are directly

22   attributable to the market’s reaction to the disclosure of information that had previously been

23   misrepresented or concealed by defendants, and to the market’s adjustment of the Company’s

24   securities prices to reflect the newly emerging truth about the Company’s condition. Had Lead

25   Plaintiff and the other members of the Class known of the material adverse information not

26   disclosed by defendants named herein, or been aware of the truth behind these defendants’

27   material misstatements, they would not have purchased Accredited securities at artificially

28   inflated prices.

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 1          303.     Moreover, throughout the Class Period, defendants concealed the true financial

 2   condition of the Company, its true underwriting procedures, and material risks to the Company’s

 3   liquidity. As a result, investors in Accredited securities were misled as to, among other things,

 4   the creditworthiness of the Company and its future prospects and ability to fund its operations.

 5   The material risks, including those relevant to evaluation of the Company’s potential to suffer a

 6   liquidity crisis and possible bankruptcy, materialized to the detriment of plaintiffs causing the

 7   Company’s securities to be devalued and damages to plaintiffs.

 8          H.       Presumption Of Reliance

 9          304.     The market for the Company’s securities was, at all times, an efficient market that

10   promptly digested current information with respect to the Company from all publicly-available

11   sources and reflected such information in the prices of the Company’s securities. Throughout the

12   Class Period:

13          (a)      Accredited stock was actively traded on the NASDAQ;

14          (b)      The market price of Accredited securities reacted promptly to the dissemination

15   of public information regarding the Company;

16          (c)      Securities analysts followed and published research reports regarding Accredited

17   that were publicly available to investors;

18          (d)      The average weekly trading volume for Accredited stock during the Class Period

19   was approximately 5 million shares, or approximately 20% of average total outstanding shares;

20   and

21          (e)      The Company’s market capitalization was as high as $1.2 billion during the Class

22   Period and the Company had over 25 million shares outstanding as of November 2006.

23          305.     Throughout the Class Period, the Company was consistently followed by

24   securities analysts as well as the business press. During this period, Accredited and certain

25   defendants continued to pump materially false information into the marketplace regarding the

26   financial condition of the Company. This information was promptly reviewed and analyzed by

27   the ratings agencies, analysts and institutional investors; assimilated into the ratings agencies’

28   ratings for the preferred shares issued by the REIT and into analysts and investors’ analysis of

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 1   the creditworthiness and the probability of default on the preferred shares; and reflected in the

 2   market price of the preferred shares.

 3           306.    The REIT’s preferred shares traded on the NYSE with 100,000 shares outstanding

 4   and a market capitalization of approximately $2.5 million.

 5           307.    As a result of the misconduct alleged herein (including defendants’ misstatements

 6   and omissions), the market for Accredited securities was artificially inflated.        Under such

 7   circumstances, the presumption of reliance available under the “fraud-on-the-market” theory

 8   applies.

 9           308.    Lead Plaintiff and the other Class members justifiably relied on the integrity of

10   the market price for the Company’s securities and were substantially damaged as a direct and

11   proximate result of their purchases of Accredited securities at artificially inflated prices and the

12   subsequent decline in the price of those securities when the truth was disclosed.

13           309.    Had Lead Plaintiff and the other members of the Class known of the material

14   adverse information not disclosed by the defendants, or been aware of the truth behind the

15   defendants’ material misstatements, they would not have purchased Accredited securities at

16   artificially inflated prices.

17           I.      No Safe Harbor Protection

18           310.    The statutory safe harbor provided for forward-looking statements under certain

19   circumstances does not apply to any of the allegedly false or misleading statements pleaded in

20   this Complaint. The statements alleged to be false or misleading herein all relate to then-existing

21   facts and conditions. In addition, to the extent certain of the statements alleged to be false or

22   misleading may be characterized as forward-looking, they were not adequately identified as

23   forward-looking statements when made, and there were no meaningful cautionary statements

24   identifying important facts that could cause actual results to differ materially from those in the

25   purportedly forward-looking statements. To the extent that the statutory safe harbor is intended

26   to apply to any forward-looking statements pleaded herein, defendants are liable for those false

27   forward-looking statements because at the time each of those forward-looking statements was

28   made, defendants had actual knowledge that the particular forward-looking statement was

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 1   materially false or misleading. In addition, to the extent any of the statements set forth above

 2   were accurate when made, they became inaccurate or misleading because of subsequent events,

 3   and defendants failed to update those statements which later became inaccurate.

 4                 Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5
                           Promulgated Thereunder Against All Defendants
 5
            311.    Plaintiffs repeat and re-allege each of the allegations set forth in the foregoing
 6
     paragraphs as if fully set forth herein.
 7
            312.    Throughout the Class Period, defendants individually and in concert, directly and
 8
     indirectly, by the use and means of instrumentalities of interstate commerce and/or of the United
 9
     States mails, engaged and participated in a continuous course of conduct to conceal adverse
10
     material information about Accredited, including its true financial results and prospects, as
11
     specified herein.   Defendants employed devices, schemes and artifices to defraud while in
12
     possession of material, adverse non-public information and engaged in acts, practices and a
13
     course of conduct that included the making of, or participation in the making of, untrue and/or
14
     misleading statements of material facts and/or omitting to state material facts necessary in order
15
     to make the statements made about Accredited not misleading. Specifically, defendants knew or,
16
     but for their recklessness, should have known that the Company’s reported financial results
17
     during the Class Period, as filed with the SEC and disseminated to the investing public, were
18
     materially overstated and were not presented in accordance with GAAP. Further, defendants
19
     knew of existing adverse facts which undermined their representations about Accredited’s
20
     existing business and prospects during the Class Period.
21
            313.    Accredited and the Individual Defendants, as top executive officers of the
22
     Company, are liable as direct participants in the wrongs complained of herein. Through their
23
     positions of control and authority as officers of the Company, each of the Individual Defendants
24
     was able to and did control the content of the public statements disseminated by Accredited.
25
     With knowledge of the falsity and/or misleading nature of the statements contained therein and
26
     in reckless disregard of the true financial results of the Company, the defendants caused the
27

28

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 1   heretofore complained of public statements to contain misstatements and omissions of material

 2   facts as alleged herein.

 3          314.    Defendants acted with scienter throughout the Class Period, in that they either had

 4   actual knowledge of the misrepresentations and/or omissions of material facts set forth herein, or

 5   acted with reckless disregard for the truth in that they failed to ascertain and to disclose the true

 6   facts, even though such facts were available to them. The Individual Defendants were among the

 7   senior management of the Company, and were therefore directly responsible for the false and

 8   misleading statements and/or omissions disseminated to the public through press releases, news

 9   reports and filings with the SEC.

10          315.    Defendants’ misrepresentations and/or omissions were intentional or reckless and

11   done for the purpose of enriching themselves at the expense of Lead Plaintiff and the Class and

12   to conceal the Company’s true operating condition from the investing public.             Defendants

13   engaged in this scheme to inflate the Company’s reported revenues and prospects in order to

14   create the illusion that Accredited was a successful, strong and growing sub-prime lending

15   company.

16          316.    As a result of those deceptive practices and false and misleading statements

17   and/or omissions, the market price of Accredited’s securities was artificially inflated throughout

18   the Class Period. In ignorance of the false and misleading nature of the representations and/or

19   omissions described above and the deceptive and manipulative devices employed by defendants,

20   Lead Plaintiff and the other members of the Class, in reliance on either the integrity of the

21   market or directly on the statements and reports of defendants, purchased Accredited securities at

22   artificially inflated prices and were damaged thereby.

23          317.    Had plaintiffs and the other members of the Class known of the material adverse

24   information not disclosed by defendants, or been aware of the truth behind defendants’ material

25   misstatements, they would not have purchased Accredited securities at artificially inflated prices.

26          318.    By virtue of the foregoing, defendants have violated Section 10(b) of the

27   Exchange Act and Rule 10b-5 promulgated thereunder.

28

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 1                            Violations Of Section 20(a) Of The Exchange
                          Act Against the Individual Defendants and Accredited
 2
            319.    Plaintiffs repeat and re-allege each of the allegations set forth in the foregoing
 3
     paragraphs as if fully set forth herein.
 4
            320.    Accredited, as indirect owner of all the common stock of the REIT, was, at the
 5
     time of the wrongs alleged herein, a controlling person of the REIT within the meaning of
 6
     Section 20(a) of the Exchange Act. It had the power and influence and exercised the same to
 7
     cause the REIT to engage in the illegal conduct and practices complained of herein.
 8
            321.    Defendant Konrath, by virtue of his position with Accredited and his specific acts,
 9
     was, at the time of the wrongs alleged herein, a controlling person of Accredited and the REIT
10
     within the meaning of Section 20(a) of the Exchange Act. He had the power and influence and
11
     exercised the same to cause Accredited and the REIT to engage in the illegal conduct and
12
     practices complained of herein. Konrath was the Company’s CEO and Chairman of the Board of
13
     Directors, as well as for the REIT, and actively managed the Company and the REIT and its
14
     reporting to investors and its lending practices. Defendant Konrath was thereby and otherwise a
15
     culpable participant in the fraud perpetrated by Accredited and the REIT.
16
            322.    Defendant Lydon, by virtue of his position with Accredited and his specific acts,
17
     was, at the time of the wrongs alleged herein, a controlling person of Accredited and the REIT
18
     within the meaning of Section 20(a) of the Exchange Act. He had the power and influence and
19
     exercised the same to cause Accredited and the REIT to engage in the illegal conduct and
20
     practices complained of herein. Lydon was the Company’s President and Chief Operating
21
     Officer and served on the Company’s Board of Directors, as well as for the REIT, and actively
22
     managed the Company and the REIT and its reporting to investors and its lending practices.
23
     Defendant Lydon was thereby and otherwise a culpable participant in the fraud perpetrated by
24
     Accredited and the REIT.
25
            323.    Defendant Marvin, by virtue of his position with Accredited and his specific acts,
26
     was, at the time of the wrongs alleged herein, a controlling person of Accredited and the REIT
27
     within the meaning of Section 20(a) of the Exchange Act. He had the power and influence and
28

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 1   exercised the same to cause Accredited and the REIT to engage in the illegal conduct and

 2   practices complained of herein. Marvin was the Company’s Executive Vice President and one of

 3   its three members of the Executive Management (along with Konrath and Lydon). He was also

 4   Executive Vice President of the REIT and its Secretary. He actively managed the Company and

 5   the REIT and its reporting to investors and its lending practices. Defendant Konrath was thereby

 6   and otherwise a culpable participant in the fraud perpetrated by Accredited and the REIT.

 7          324.    Defendant Buchanan, by virtue of his position with Accredited and his specific

 8   acts, was, at the time of the wrongs alleged herein, a controlling person of Accredited and the

 9   REIT within the meaning of Section 20(a) of the Exchange Act. He had the power and influence

10   and exercised the same to cause Accredited and the REIT to engage in the illegal conduct and

11   practices complained of herein. Buchanan was the Company’s CFO, as well as for the REIT,

12   and actively managed the Company and the REIT and its reporting to investors and its lending

13   practices. Defendant Buchanan was thereby and otherwise a culpable participant in the fraud

14   perpetrated by Accredited and the REIT.

15          325.    Defendant Crawford, by virtue of his position with Accredited and his specific

16   acts, was, at the time of the wrongs alleged herein, a controlling person of Accredited within the

17   meaning of Section 20(a) of the Exchange Act. He had the power and influence and exercised

18   the same to cause Accredited to engage in the illegal conduct and practices complained of herein.

19   Crawford was the Company’s Director of Operations and actively managed the Company and its

20   reporting to investors and its lending practices and had direct oversight of the Company’s

21   underwriting function. Defendant Crawford was thereby and otherwise a culpable participant in

22   the fraud perpetrated by Accredited and the REIT.

23          326.    By reason of the conduct of Accredited as alleged in this Complaint, the

24   Individual Defendants are liable for the aforesaid wrongful conduct of Accredited and liable to

25   Lead Plaintiff and the Class for the substantial damages which they suffered in connection with

26   their purchases or acquisitions of shares as a result of Accredited’s violations of the Exchange

27   Act.

28

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                                                 -105-                    CLASS ACTION COMPLAINT
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 1   III.      THIRD CLAIM FOR RELIEF – For Violations Of Section 14(a) Of The Exchange Act
               And Rule 14a-9 Promulgated Thereunder Against Defendants Accredited, Konrath,
 2             Lydon, Gunderson, Pratt, Erickson, Espy, Berglund And Marvin
 3             327.   Plaintiffs incorporate by reference all paragraphs above as though fully set forth
 4   herein.
 5             328.   This claim is asserted against defendants Accredited, James A. Konrath, Joseph J.
 6   Lydon, Jody A. Gunderson, Richard T. Pratt, Gary M. Erickson, Bowers W. Espy, James H.
 7   Berglund and Stuart D. Marvin on behalf of all members of the Class who held common stock of
 8   Aames on August 1, 2006, and held those shares on September 14, 2006, for violations of
 9   Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and Rule 14a-9, 17 C.F.R. § 240.14a-9.
10   Each defendant named in this Claim solicited proxies by means of the Joint Proxy Statement and
11   Prospectus, which was distributed to Accredited and Aames shareholders, by permitting the use
12   of their names in the Joint Proxy Statement and Prospectus and/or by recommending in the Joint
13   Proxy Statement and Prospectus that Accredited and Aames shareholders approve the merger.
14             329.   Defendants James A. Konrath, Joseph J. Lydon, Jody A. Gunderson, Richard T.
15   Pratt, Gary M. Erickson, Bowers W. Espy, and James H. Berglund were all directors of the
16   Company at the time the Joint Proxy Statement and Prospectus was approved, and at all relevant
17   times. Defendants Konrath, Lydon, Gunderson, Pratt, Erickson, Espy, and Berglund signed the
18   S-4 Registration Statement that contained the Joint Proxy and Prospectus allowing it to be filed
19   with the SEC. Defendant Marvin was Secretary of the Board of Directors and signed the Joint
20   Proxy and Prospectus on behalf of the entire Accredited Board of Directors.
21             330.   The Joint Proxy Statement and Prospectus described herein was a “proxy
22   solicitation” within the meaning of Section 14(a) of the Exchange Act and Rule 14a-9
23   promulgated thereunder.
24             331.   The Joint Proxy Statement and Prospectus contained numerous false and
25   misleading statements. At page 6 of the Joint Proxy Statement and Prospectus, Accredited’s
26   business is falsely and misleadingly described. The Joint Proxy Statement and Prospectus states:
27   “Accredited originates loans primarily based upon the borrower’s willingness and ability to
28   repay the loan and the adequacy of the collateral.        Its experienced management team has
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 1   developed incentive programs, technology tools and business processes intended to focus

 2   Accredited’s employees on originating non-prime mortgage loans with the financial and other

 3   characteristics that generate profits.”

 4          332.     The Joint Proxy Statement and Prospectus included Accredited’s false and

 5   misleading 2005 financial results that had been artificially inflated as a result the Company’s

 6   increased loan volume driven by deviations from the Company’s underwriting policies as set

 7   forth in Section II.D.

 8          333.    The Joint Proxy Statement and Prospectus included false and misleading pro

 9   forma financial information purporting to show the combined Company’s financial results for

10   2005 and the first quarter of 2006, which pro forma results were misleading for the reasons set

11   forth in Section II.D.4.

12          334.    The Joint Proxy Statement and Prospectus referenced, and attached as an exhibit,

13   the Company’s representations and warranties made in the Merger Agreement. Among other

14   things, the Company falsely and misleadingly represented:

15          Acquiror has filed or furnished, as applicable, on a timely basis all forms,
            statements, reports and documents required to be filed or furnished by it with the
16          SEC under the Exchange Act or the Securities Act since the Applicable Date (the
            forms, statements, reports and documents filed or furnished since the Applicable
17          Date and those filed or furnished subsequent to the date hereof including any
            amendments thereto, the “Acquiror Reports”). Each of the Acquiror Reports, at
18          the time of its filing or being furnished, complied, or if not yet filed or furnished,
            will comply, in all material respects with the applicable requirements of the
19          Securities Act, the Exchange Act and the Sarbanes-Oxley Act, and any rules and
            regulations promulgated thereunder applicable to the Acquiror Reports. As of
20          their respective dates (or, if amended prior to the date hereof, as of the date of
            such amendment) the Acquiror Reports did not, and any Acquiror Reports filed
21          or furnished with the SEC subsequent to the date hereof will not, contain any
            untrue statement of a material fact or omit to state a material fact required to be
22          stated therein or necessary to make the statements made therein, in light of the
            circumstances in which they were made, not misleading.
23
            335.    Similarly, the Merger Agreement falsely represented that the Company
24
     maintained disclosure controls and procedures required by Rule 13a-15 or 15d-15 under the
25
     Exchange Act and other such internal controls over financial reporting to provide “reasonable
26
     assurance regarding the reliability of financial reporting and the preparation of financial
27
     statements.”
28

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 1          336.    As set forth herein, the Company filed SEC filings that did contain untrue

 2   statements of a material fact or omitted to state a material fact required to be stated therein or

 3   necessary to make the statements made therein, in light of the circumstances in which they were

 4   made, not misleading, and the Company either did not have or defendants disregarded the

 5   Company’s disclosure controls and procedures and other such internal controls over financial

 6   reporting.

 7          337.    The Joint Proxy Statement and Prospectus included false and misleading risk

 8   disclosures that failed to disclose that the Company had substantially deviated from its

 9   underwriting guidelines to maintain and/or increase loan volume as set forth in Section II.D.3.

10   Moreover, the Joint Proxy Statement and Prospectus was false and misleading in that, at page 27,

11   it discussed potential deviation from underwriting standards as a hypothetical future event and

12   not something that had already been occurring at the Company for well over a year: “If

13   Accredited’s competitors adopt less stringent underwriting standards, it will be pressured to do

14   so as well, which would result in greater loan risk without compensating pricing. If Accredited

15   does not relax underwriting standards in response to its competitors, it may lose market share.”

16          338.    Defendants misleadingly represented at page 28 that the Company employed

17   “appropriate underwriting policies” and that “Aames’s [historic] higher delinquency rate is due

18   to the lower credit quality of its typical borrower as compared to Accredited’s.” This statement

19   was false and misleading because the Company did not abide by its underwriting policies and

20   Aames’s underwriting standards were stricter than those utilized by Accredited at the time of the

21   Joint Proxy Statement and Prospectus, as set forth in Section II.D.3.

22          339.    The Joint Proxy Statement and Prospectus included the false and misleading

23   statement at page 34: “Accredited believes that it has qualified personnel at all levels and has

24   established controls to ensure that all loans are originated to the market’s requirements, but

25   Accredited cannot assure you that it will not make mistakes, or that certain employees will not

26   deliberately violate its lending policies.” This statement was false and misleading because the

27   Company did not abide by its “established controls” at the time the Joint Proxy Statement and

28   Prospectus was issued.

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 1          340.   The Joint Proxy Statement and Prospectus included the false and misleading

 2   assertion at page 61 that, based upon financial projections for 2006-2009 provided by

 3   Accredited’s management, the Company then had an “implied equity value [] per share” of

 4   $55.18 to $88.31.

 5          341.   The Joint Proxy Statement and Prospectus incorporated by reference: (i) the

 6   Company’s Form 10-K filed with the SEC on March 16, 2006; (ii) the Company’s Form 10-Q

 7   filed with the SEC on May 10, 2006; (iii) numerous of the Company’s Form 8-K filings filed

 8   with the SEC between February 6, 2006 and June 30, 2006; and (iv) any SEC filing between the

 9   date of the Joint Proxy Statement and Prospectus and the date of the special meeting of the

10   Accredited and Aames shareholders (which includes the Company’s Form 10-Q for the quarter

11   ended June 30, 2006, filed with the SEC on August 9, 2006). Plaintiffs repeat and re-allege all

12   allegations in ¶¶173-281 pertaining to the false and misleading statements contained in

13   Accredited’s SEC filings incorporated by reference in the Joint Proxy Statement and Prospectus.

14          342.   The acquisition required and received the affirmative vote of Aames’s

15   shareholders at the Special Meeting on September 14, 2006. Thus, the Joint Proxy Statement

16   and Prospectus was an essential link in the accomplishment of the acquisition.

17          343.   As a result of the foregoing, defendants named in this Claim have violated Section

18   14(a) of the Exchange Act and SEC Rule 14a-9 promulgated thereunder.

19   IV.    FOURTH AND FIFTH CLAIMS FOR RELIEF – For Violations Of Sections 11 And 15
            Of The Securities Act Against Defendants Accredited, Konrath, Lydon, Gunderson, Pratt,
20          Erickson, Espy, And Berglund
21          344.   These claims for relief do not incorporate by reference the paragraphs above.
22          345.   Plaintiff William F. Kornfeld (“Kornfeld”) asserts these claims for violations of
23   Sections 11 and 15 of the Securities Act, 15 U.S.C. Section 77k, against defendants Accredited,
24   Konrath, Lydon, Gunderson, Pratt, Erickson, Espy and Berglund on behalf of themselves and
25   other members of the Class who acquired Accredited stock in exchange for Aames stock. Each
26   of the plaintiffs bringing these Claims acquired Accredited’s shares issued and registered
27   pursuant to Accredited’s Registration Statement on Form S-4 filed with the SEC on July 14,
28   2006 (the “Registration Statement”). The Registration Statement included a Joint Proxy and
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 1   Prospectus. These Claims also assert against defendants Konrath and Lydon for violations of

 2   Section 15 of the Securities Act, 15 U.S.C. § 77o, by virtue of their direct and indirect control of

 3   Accredited.

 4          346.     The defendants named in these Claims signed the Registration Statement and

 5   were directors of Accredited at the time the Registration Statement was filed with the SEC.

 6          347.     The Registration Statement contained numerous false and/or misleading

 7   statements, as is detailed herein.

 8          348.     Accredited issued the shares registered by the Registration Statement on October

 9   1, 2006.      The shares were issued in connection with Accredited’s acquisition of Aames

10   Investment Corporation, which acquisition closed on October 1, 2006. Plaintiffs in the Class

11   who acquired Accredited stock in exchange for Aames stock pursuant to the acquisition received

12   0.07 shares of Accredited for each share of Aames exchanged.              Plaintiffs acquired their

13   Accredited shares in connection with the merger without knowledge of the false statements and

14   omissions alleged herein. As a direct and proximate result, plaintiffs have suffered substantial

15   damages.

16          349.     In connection with the issuing of the Registration Statement, defendants, directly

17   or indirectly, used the means and instrumentalities of interstate commerce, including, but not

18   limited to, the United States mails, interstate telephone communications and the facilities of

19   national securities exchanges.

20          350.     This action was brought within one year after the discovery of the untrue

21   statements and omissions (and within one year after such discovery should have been made in

22   the exercise of reasonable diligence) and within three years after the acquisition of Aames by

23   Accredited.

24          A.       Jurisdiction And Venue

25          351.     The claims in this Count arise under Sections 11 and 15 of the Securities Act, 15

26   U.S.C. §§ 77k and 77o.

27          352.     This Court has jurisdiction over these claims under Section 22(a) of the Securities

28   Act, 15 U.S.C. § 77v(a), 28 U.S.C. §§ 1331 and 1337 for these claims.

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 1           353.    Venue is proper in this District under Section 22(a) of the Securities Act, 15

 2   U.S.C. § 77v(a). The wrongs alleged herein occurred, in substantial part, in this District. At all

 3   relevant times, Accredited conducted, and still conducts, significant business in this District and

 4   maintains its principal place of business in San Diego. At all relevant times, defendants named

 5   herein conducted substantial business and/or resided in this District or committed violations of

 6   U.S. law by acts committed in this District.

 7           B.      The Parties

 8           354.    Court-appointed Lead Plaintiff, the Arkansas Teacher Retirement System

 9   (“ATRS” or “Lead Plaintiff”), was established in 1937 to provide retirement benefits to the

10   employees of the state’s education community. For the fiscal year ending June 30, 2006,

11   ATRS’s total assets equaled $11.27 billion with 85,916 active members and 24,050 retirees

12   receiving benefits through the system. During the Class Period, ATRS purchased Accredited

13   common stock. As a result of these purchases and the violations of the securities laws alleged

14   herein, ATRS suffered substantial damages. On June 25, 2007, the Court appointed ATRS as

15   Lead Plaintiff in this litigation.

16           355.    Plaintiff William F. Kornfeld (“Kornfeld”) acquired 561 shares of Accredited

17   common stock in exchange for 6,000 shares of Aames common stock pursuant to Accredited’s

18   acquisition of Aames and, as a result, and because of the violations of the securities laws alleged

19   herein, Kornfeld suffered substantial damages.

20           356.    Accredited Home Lenders Holding Co. (“Accredited” or the “Company” or

21   “Lend”) is a mortgage banking company operating throughout the United States and in Canada.

22   The Company originates, finances, securitizes, services and sells sub-prime (a/ka/ non-prime)

23   mortgage loans secured by residential real estate. Accredited focuses on borrowers who may not

24   qualify for loans from traditional banking entities because of higher loan-to-value ratios, the

25   nature or absence of income documentation, limited credit histories, high levels of consumer

26   debt, or past credit difficulties.

27           357.    James A. Konrath (“Konrath”) is a founder of the Company and was at all

28   relevant times Chairman of the Board and Chief Executive Officer of Accredited and labeled by

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 1   the Company as part of its Executive Management. Prior to founding Accredited, Mr. Konrath

 2   was the President and Chief Executive Officer of Security Pacific Financial Services, Inc., where

 3   he managed over 1,900 people in more than 300 consumer finance offices, from 1986 to 1989.

 4   From 1983 to 1986, Mr. Konrath was the President and Chief Executive Officer of Security

 5   Pacific Housing Services, where he founded a new subsidiary focused on manufactured housing

 6   loans. Mr. Konrath earned a Bachelor of Arts degree in Accounting with a minor in Economics

 7   from the University of Wisconsin—Whitewater in 1969.

 8          358.    Joseph J. Lydon (“Lydon”) was at all relevant times President and Chief

 9   Operating Officer of Accredited and served on the Company’s Board of Directors and was

10   labeled by the Company as part of its Executive Management. Mr. Lydon is a veteran of more

11   than two decades in the mortgage banking industry, having joined Accredited in 1997 from Ford

12   Consumer Finance, a division of The Associates First Capital Corporation, where he served as

13   Executive Vice President for the western division from 1993 to 1997. From 1977 to 1993, Mr.

14   Lydon worked at Security Pacific Financial Services, Inc., rising to the level of Senior Vice

15   President in charge of six operating divisions. Mr. Lydon earned a Bachelor of Science degree in

16   Management from Pepperdine University in 1991.

17          359.    Jody A. Gunderson (“Gunderson”) has served as a director of Accredited since

18   January 2000. Ms. Gunderson is chairperson of the Audit Committee of Accredited’s Board.

19   Ms. Gunderson currently serves as a managing director at Cargill Value Investment, a position

20   that she has held since 1998. In that position Ms. Gunderson manages investments in portfolios

21   of credit-intensive residential mortgage loans and consumer loans and manages co-investment

22   and servicing relationships.   From 1994 to 1998, Ms. Gunderson served as an investment

23   manager at Cargill Value Investment, providing capital to sub-prime mortgage companies and

24   other specialty finance companies.        From 1985 to 1994, Ms. Gunderson worked at

25   PricewaterhouseCoopers LLP. She was a manager in the financial services industry practice

26   where she served investment fund, commercial banking and thrift clients. Ms. Gunderson earned

27   her Bachelor of Science degree in Accounting from the University of Minnesota in 1986 and is a

28   certified public accountant in Minnesota (inactive).

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 1          360.   Richard T. Pratt, DBA (“Pratt”), has served as a director of Accredited since

 2   March 2003. Dr. Pratt is a member of the Audit and Nominating and Corporate Governance

 3   Committees of Accredited’s Board. Dr. Pratt is currently the Chairman of Richard T. Pratt

 4   Associates, a position he has held since 1992, at which he performs consulting activities. Dr.

 5   Pratt held the positions of Associate Professor and Professor of Finance at the David Eccles

 6   School of Business at the University of Utah from 1966 to 1997, when he retired. From 1991 to

 7   1994, Dr. Pratt served as a Managing Director of the Financial Institutions Group of Merrill

 8   Lynch. From 1983 to 1991, Dr. Pratt served as Chairman of Merrill Lynch Mortgage, Inc., a

 9   subsidiary of Merrill Lynch & Company. Dr. Pratt was Chairman of the Federal Home Loan

10   Mortgage Corporation from 1981 to 1983, and served as Chairman of the Federal Savings and

11   Loan Insurance Corporation during that time. Dr. Pratt was also the presidential appointee

12   serving as Chairman of the Federal Home Loan Bank Board from 1981 to 1983. In addition, Dr.

13   Pratt served as a director of American Residential Investment Trust, Inc., from 1997 to 2005.

14   Dr. Pratt currently serves as a director of Celtic Bank, Salt Lake City, a position he has held

15   since 2001. Dr. Pratt received his Bachelor of Science degree in Finance from the University of

16   Utah in 1960, his Masters in Business Administration from the University of Utah in 1961, and

17   his Doctor of Business Administration from Indiana University in 1966.

18          361.   Gary M. Erickson (“Erickson”) has served as a director of Accredited since

19   March 2003. Mr. Erickson is a lawyer with his own law firm and President and Chief Executive

20   Officer of Seacoast Real Estate & Development Co., Inc., a San Diego real estate investment and

21   development firm.

22          362.   Bowers W. Espy (“Espy) has served as a director of Accredited since July 2004.

23   Mr. Espy has 30 years of experience in mortgage and corporate finance. Mr. Espy joined Merrill

24   Lynch as vice president, mortgage finance officer and mortgage securities trader in 1983. In

25   1985, he established Merrill Lynch’s first residential and commercial whole loan trading

26   department. In 1987, he was named executive vice president and chief operating officer of

27   Merrill Lynch Mortgage Capital Inc., responsible for all mortgage securitization activity, CMO

28   issuance and the operation of Merrill Lynch’s mortgage banking subsidiary. From 1989 to 1993,

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 1   as managing director of investment banking and head of the financial institutions restructuring

 2   group, Mr. Espy had responsibility for the acquisition of residential and commercial loan

 3   portfolios and consumer receivables, primarily from the Resolution Trust Corporation. He was

 4   named co-head of the depository institutions’ mergers and acquisitions department in 1993

 5   where, among other assignments, he served as senior advisor to Dime Savings Bank of New

 6   York in a financial institution rights offering. Mr. Espy earned a Bachelor of Science degree in

 7   Business Administration in 1972 and a Master of Arts degree in Economics in 1976 from the

 8   University of Florida.

 9          363.    James H. Berglund (“Berglund”) has served as a director of Accredited since

10   September 1999. Berglund currently serves as a general partner and managing director of

11   Enterprise Partners Venture Capital, positions he has held since 1985. Mr. Berglund earned a

12   Bachelor of Science degree in Economics from the University of Wisconsin in 1954.

13          C.      Background

14          364.    In 2005 and throughout the Class Period, including the months prior to the closing

15   of the Aames acquisition, the Company originated loans to borrowers who were unable and/or

16   unwilling to repay the loans. During this period, the Company’s underwriters and management

17   failed to insure that the Company originated loans that complied with underwriting standards. In

18   fact, the Company originated many loans that were not in compliance with the Company’s

19   underwriting policies. In many instances, the Company’s underwriters and/or appraisers denied

20   loan applications that did not comply with the Company’s underwriting policies but their

21   decisions were overridden and the loans were extended nonetheless.

22          365.    Because the decisions of the Company’s appraisers were being overridden, the

23   Company originated many loans that were not adequately collateralized. As a result, purchasers

24   of these loans were able to force the Company to repurchase the loans, which happened often

25   when the borrower defaulted on the loan. Many of the Company’s loan repurchases at the end of

26   the Class Period were the result of inadequate collateral.

27          366.    The Company’s financial statements issued for 2005, 1Q’06 and 2Q’06, which

28   were all incorporated by reference in the Registration Statement, were false and misleading

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 1   because they did not comply with Generally Accepted Accounting Principles (“GAAP”). GAAP

 2   are those principles recognized by the accounting profession as conventions, rules and

 3   procedures necessary to define accounting practices at a particular time. The SEC has the

 4   statutory authority for the promulgation of GAAP for public companies and has delegated that

 5   authority to the Financial Accounting Standards Board. SEC Regulation S-X (17 C.F.R. §

 6   210.4-01(a)(1)) provides that financial statements filed with the SEC which are presented in

 7   accordance with GAAP will be presumed to be misleading, despite footnotes or other

 8   disclosures.

 9          367.    During the Class Period, Accredited securitized loans. Accredited refers to the

10   loans it securitizes as mortgage loans held for investment (“MLIs”). GAAP required Accredited

11   to establish a reserve for potential credit losses on the MLIs when the underlying borrowers

12   default on their obligation to make monthly mortgage payments. This reserve is an allowance

13   for loan losses or “ALL”.

14          368.    The SEC provided explicit guidance on the proper accounting that Accredited

15   should have followed but did not. SEC Staff Accounting Bulletin: No. 102 – Selected Loan Loss

16   Allowance Methodology and Documentation Issues, states in part:

17          The staff normally would expect a registrant that engages in lending activities to
            develop and document a systematic methodology to determine its provision for
18          loan losses and allowance for loan losses as of each financial reporting date. It is
            critical that loan loss allowance methodologies incorporate management's
19          current judgments about the credit quality of the loan portfolio through a
            disciplined and consistently applied process. A registrant’s loan loss allowance
20          methodology is influenced by entity-specific factors, such as an entity’s size,
            organizational structure, business environment and strategy, management style,
21          loan portfolio characteristics, loan administration procedures, and management
            information systems. However, as indicated in the AICPA Audit and Accounting
22          Guide, Banks and Savings Institutions (Audit Guide), “[w]hile different
            institutions may use different methods, there are certain common elements that
23          should be included in any [loan loss allowance] methodology for it to be
            effective.” A registrant’s loan loss allowance methodology generally should:
24
                •   Include a detailed analysis of the loan portfolio, performed on a regular
25                  basis;

26              •   Consider all loans (whether on an individual or group basis);
27              •   Identify loans to be evaluated for impairment on an individual basis under
                    SFAS No. 114 and segment the remainder of the portfolio into groups of
28                  loans with similar risk characteristics for evaluation and analysis under
                    SFAS No. 5;
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 1             •   Consider all known relevant internal and external factors that may affect
                   loan collectibility;
 2
               •   Be applied consistently but, when appropriate, be modified for new factors
 3                 affecting collectibility;

 4             •   Consider the particular risks inherent in different kinds of lending;
 5             •   Consider current collateral values (less costs to sell), where applicable;
 6             •   Require that analyses, estimates, reviews and other loan loss allowance
                   methodology functions be performed by competent and well-trained
 7                 personnel;

 8             •   Be based on current and reliable data;
 9             •   Be well documented, in writing, with clear explanations of the supporting
                   analyses and rationale . . .; and
10
               •   Include a systematic and logical method to consolidate the loss estimates
11                 and ensure the loan loss allowance balance is recorded in accordance with
                   GAAP.
12
            For many entities engaged in lending activities, the allowance and provision for
13          loan losses are significant elements of the financial statements. Therefore, the
            staff believes it is appropriate for an entity’s management to review, on a
14          periodic basis, its methodology for determining its allowance for loan losses.
15          369.   Accredited did not establish an adequate ALL, violating GAAP and inflating net

16   income.

17          370.   The table below indicates that beginning with the Company’s reported financial

18   results for the third quarter of 2005, in every quarter the Company reduced the amount of its

19   ALL in proportion to the amount of delinquencies the Company was then experiencing. While

20   the amount of MLI was increasing in the Class Period, and the delinquencies were increasing

21   dramatically every quarter, the Company reduced the proportion of its ALL relative to the

22   amount of delinquencies:

23

24

25

26

27

28

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 1                    Mortgage        Allowance            MLI 90+       % of MLI          ALL as a %
                     Loans Held        for Loan           Delinquent        90+              of 90+
 2                       for            Losses            ($ millions)   Delinquent        Delinquent
                     Investment       ($ millions)
 3
                     ($ millions)
 4     2Q’06           7,809.5           125.4               96.6            1.24%           129.74%
       1Q’06           7,763.2           115.7               85.5            1.10%           135.36%
 5     4Q’05           7,321.6           106.0               71.3            0.97%           148.56%
       3Q’05           5,874.9           95.7                49.1            0.84%           195.04%
 6
       2Q ‘05          5,214.5           84.2                36.3            0.70%           231.98%
 7     1Q’05           4,667.6           69.3                29.7            0.64%           233.54%
       4Q’04            4,102            60.1                22.6            0.55%           265.70%
 8     3Q’04            4,084            51.3                18.5            0.45%           277.45%
       2Q’04            3,303            40.8                12.9            0.39%           316.34%
 9
       1Q’04           2,142.3           24.7                 8.7            0.41%           283.75%
10

11          371.     As the amount of 90+ days delinquent loans increased during the period (from

12   $8.7 million in 1Q’04 to $96.6 million in 2Q’06), the percentage of the allowance for mortgage

13   loans related to delinquent loans decreased dramatically (from 283.75% in 1Q’04 to 129.74% in

14   2Q’06).    This, along with the facts alleged concerning the Company’s deviation from its

15   underwriting policies and procedures, demonstrate the Company was not taking out adequate

16   ALL reserves.

17          372.     In each of the six quarters prior to the Class Period, the Company maintained its

18   ALL reserve at no less than 232% of the Company’s MLI 90+ Days Delinquent. During the

19   Class Period, the defendants did not. Assuming the proper ALL level as a percentage of

20   delinquencies during the Class Period was the historic low of 232% in 2Q05 (it should have been

21   higher because the Company deviated from its underwriting standards during the Class Period),

22   the amount of the ALL understatement – and corresponding inflation of publicly reported

23   income – is set forth in the table below (all numbers in $ millions):

24

25

26

27

28

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 1                  ALL Reserve         Proper ALL            ALL             Cumulative
                      Actual          Reserve at 232%        Reserve          Inflation of
 2                                     MLI 90+ Day          Deficiency      Reported Income
                                       Delinquencies                             from
 3
                                                                             Manipulation
 4         2Q’06         125.4             224.212              98.8              98.8
           1Q’06         115.7             198.36               82.6              82.6
 5         4Q’05         106.0             165.56              59.54             59.54
           3Q’05          95.7             113.87              18.14             18.14
 6

 7          373.    The Company’s reserves for Real Estate Owned (“REO”) also violated GAAP.

 8   REO is real estate the Company owns as a result of a borrower’s default and a subsequent

 9   foreclosure by the Company. Throughout the Class Period, the Company’s gross REO grew

10   dramatically. Despite the fact the Company’s gross REO was growing dramatically during the

11   Class Period, the Company did not increase the Company’s REO reserve proportionately.

12          374.    During the Class Period, Accredited sold mortgage loans to third parties. Gains

13   or losses resulting from loan sales were purportedly recognized at the time of sale, based

14   primarily on the difference between the net sales proceeds and the book value of the loans sold.

15          375.    Accredited provided purchasers of its mortgage loans with representations and

16   warranties regarding the underwriting standards the Company followed in originating the loans.

17   If a purchaser of the mortgage loans determined that a loan was not in compliance with the

18   representations and warranties OR a borrower defaulted during the early months of the loan, the

19   purchaser could require Accredited to repurchase the mortgage loan.

20          376.    As a part of the Company’s business, it regularly was required to buy back loans

21   from purchasers of the Company’s loan portfolio. Generally speaking, the Company normally

22   tried to resell repurchased loans in the “scratch and dent” market. Sales in this market were

23   normally at a loss because repurchased loans are, by the very nature, considered defective and

24   therefore less valuable. If, however, the Company could not resell its repurchased loans in the

25   “scratch and dent” market and the loan defaulted, the Company would foreclose on the loan and

26   the property serving as collateral for the loan would become a part of REO.

27          377.    The following table demonstrates that in the reporting periods prior to the Class

28   Period, the Company maintained an REO reserve in excess of 40% of its gross REO. As the

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 1   gross REO grew, the Company historically increased the REO reserve. However, beginning in

 2   2Q’06 the Company’s REO reserve was clearly understated in violation of GAAP.

 3                 Gross REO          REO           Net REO           REO Reserve as a    REO Reserve
                   ($ millions)      Reserve       ($ millions)       % of Gross REO        Deficiency
 4                                 ($ millions)                                            ($ millions)
 5    4Q’04           10.53            4.41               6.12             41.85%
      1Q’05           14.90            6.40               8.50             42.95%
 6    2Q’05           16.90            7.01               9.89             41.48%
      3Q’05           18.51            7.96               10.55            43.00%
 7    4Q’05           26.81           10.73               16.09            40.00%
      1Q’06           34.26           13.70               20.56            39.99%
 8
      2Q’06           52.62           12.78               39.84            24.29%              8.27
 9
            378.    As indicated in the table, the Company understated the REO reserve in, at least,
10
     the June 30, 2006 reporting period.
11
            379.    By maintaining the REO reserve at only 24% of Accredited’s gross REO – rather
12
     than 40% of the gross REO as was the case in historic reporting periods – the Company falsely
13
     and misleadingly understated REO reserve by $8.27 million in the second quarter of 2006 and
14
     overstated net income.
15
            380.    The understating of the Company’s REO reserve was a clear violation of GAAP.
16
            381.    In addition, GAAP (including SFAS No. 5, SFAS No. 140 and EITF 92-2)
17
     required that Accredited maintain a reserve on its balance sheet to cover future losses and
18
     expenses that were expected to arise as a result of repurchase obligations.
19
            382.    In accordance with SFAS No. 140, Accounting for Transfers and Servicing of
20
     Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement 125, and
21
     EITF 92-2, Measuring Loss Accruals by Transferors for Transfers of Receivables with Recourse,
22
     the reserve is estimated based on factors including the Company’s historical repurchase
23
     experience, industry repurchase experience, expected future volume of repurchases, and
24
     expected value of underlying collateral.
25
            383.    SFAS No. 140 and EITF 92-2 require the reserve to be estimated and recorded as
26
     a liability on Accredited’s balance sheet in the period in which the loans are sold, with a
27
     corresponding reduction of Accredited’s gain on whole loan sales in its income statement. Any
28

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 1   subsequent increase or decrease to the reserve is also required to be recorded as a current

 2   reduction or addition to Accredited’s gain on whole loan sales.

 3          384.    Accredited violated GAAP by not maintaining an adequate reserve on its balance

 4   sheet for losses resulting from expected repurchase obligations.

 5          385.    The Company deviated from the underwriting guidelines in 2005 and 2006 that

 6   had been represented to buyers of the Company’s loans. The Company provided a great many

 7   loans to persons with inferior credit quality, thereby causing the Company to have an increasing

 8   amount of repurchase obligations.      The Company should have substantially increased the

 9   Company’s reserves for repurchases during the Class Period.

10          386.    The inadequacy of the Company’s reserve for repurchases is evident in several

11   respects. The table below illustrates the fact that the Company’s reserve for repurchases was

12   insufficient at least as early as 2Q’06. The reserve deficiency is calculated as the amount the

13   reserve would have to be increased to equal an implied discount of 48.75%, which is the amount

14   that Accredited used in its Form 10-K for 2006 filed with the SEC after the Class Period on

15   August 2, 2007.

16                               Loans           Reserve for       Implied       Reserve
                              Repurchased        Repurchase        Discount     Deficiency
17                 4Q’05          18.1               7.4           40.88%
                   1Q’06          14.6               8.0           54.79%
18                 2Q’06          38.6               8.7           22.54%         10.12
19          387.    By 2Q06, the Company was being forced to buy back a growing number of the
20   loans it sold throughout 2005-2006, but the Company did not increase its reserves in step. This
21   was unreasonable and in violation of GAAP and, as a result of not taking sufficient reserves, the
22   Company’s reported income was inflated in 2Q’06.
23          D.      The Registration Statement
24          388.    The Registration Statement contained numerous false and misleading statements.
25   Accredited’s business is falsely and misleadingly described. The Registration Statement states:
26   “Accredited originates loans primarily based upon the borrower’s willingness and ability to
27   repay the loan and the adequacy of the collateral.        Its experienced management team has
28   developed incentive programs, technology tools and business processes intended to focus

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 1   Accredited’s employees on originating non-prime mortgage loans with the financial and other

 2   characteristics that generate profits.”

 3          389.    This statement was false and misleading because the Company did not originate

 4   loans primarily based upon the borrower’s willingness and ability to pay but rather the Company

 5   originated many loans to borrowers who either did not intend to repay them or did not have the

 6   ability to repay them, as set forth in Section IV.C. Moreover, the Company originated loans with

 7   inadequate collateral, as set forth in Section IV.C.

 8          390.    The Registration Statement included Accredited’s false and misleading 2005

 9   financial results that were false and/or misleading as a result of the Company’s failure to

10   establish adequate ALL, among other things, resulting from the Company’s deviations from its

11   underwriting policies as set forth in Section IV.C.

12          391.    The Registration Statement included false and misleading pro forma financial

13   information purporting to show the combined Company’s financial results for 2005 and the first

14   quarter of 2006, which pro forma results were misleading because the Company’s financial

15   results were false and/or misleading as a result of the Company’s failure to adequately establish

16   ALL, among other things, resulting from the Company’s deviations from its underwriting

17   policies as set forth in Section IV.C.

18          392.    The Registration Statement referenced, and attached as an exhibit, the Company’s

19   representations and warranties made in the Merger Agreement.             Among other things, the

20   Company falsely and misleadingly represented:

21          Acquiror has filed or furnished, as applicable, on a timely basis all forms,
            statements, reports and documents required to be filed or furnished by it with the
22          SEC under the Exchange Act or the Securities Act since the Applicable Date (the
            forms, statements, reports and documents filed or furnished since the Applicable
23          Date and those filed or furnished subsequent to the date hereof including any
            amendments thereto, the “Acquiror Reports”). Each of the Acquiror Reports, at
24          the time of its filing or being furnished, complied, or if not yet filed or furnished,
            will comply, in all material respects with the applicable requirements of the
25          Securities Act, the Exchange Act and the Sarbanes-Oxley Act, and any rules and
            regulations promulgated thereunder applicable to the Acquiror Reports. As of
26          their respective dates (or, if amended prior to the date hereof, as of the date of
            such amendment) the Acquiror Reports did not, and any Acquiror Reports filed
27          or furnished with the SEC subsequent to the date hereof will not, contain any
            untrue statement of a material fact or omit to state a material fact required to be
28          stated therein or necessary to make the statements made therein, in light of the
            circumstances in which they were made, not misleading.
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 1          393.    These statements were false and/or misleading because the Company filed SEC

 2   filings that did contain untrue statements of a material fact or omitted to state a material fact

 3   required to be stated therein or necessary to make the statements made therein, in light of the

 4   circumstances in which they were made, not misleading. The Company’s filings with the SEC

 5   included financial results that were false and/or misleading, as set forth in Section IV.C.

 6          394.    Moreover, the Company’s SEC filings were false and/or misleading in that they

 7   failed to disclose that the Company was substantially deviating from its underwriting policies as

 8   set forth in Section IV.C. Rather, the Company’s SEC filings misleadingly and falsely assured

 9   investors that the Company had rigid underwriting policies designed to ensure the credit quality

10   of the Company’s portfolio, such as this disclosure in the Company’s Form 10-K filed with the

11   SEC on March 16, 2006:

12          Our loan officers and account executives work closely with our underwriting
            group to ensure that the loan applications that they originate meet the quality
13          standards necessary to make it through the underwriting and funding process.
14                                            *       *       *

15          Each mortgage loan that we originate is underwritten prior to loan closing in
            accordance with our underwriting guidelines. We have developed underwriting
16          processes and criteria that we believe generate high-quality non-prime loans.
            Our underwriting guidelines are designed to help us evaluate a borrower’s credit
17          history, his or her capacity, willingness and ability to repay the loan, and the value
            and adequacy of the collateral.
18
                                              *       *       *
19
            Our underwriting process and guidelines require a rigorous application review
20          and documentation designed to maximize the value of our mortgage loans.
21          395.    Similarly, the Merger Agreement attached to the Registration Statement falsely

22   represented that the Company maintained disclosure controls and procedures required by Rule

23   13a-15 or 15d-15 under the Exchange Act and other such internal controls over financial

24   reporting to provide “reasonable assurance regarding the reliability of financial reporting and the

25   preparation of financial statements.”

26          396.    The Company either did not have or defendants negligently disregarded the

27   Company’s disclosure controls and procedures and other such internal controls over financial

28

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 1   reporting, that resulted in the Company reporting false and misleading financial results as set

 2   forth in Section IV.C.

 3          397.    The Registration Statement included false and misleading risk disclosures that

 4   failed to disclose that the Company had substantially deviated from its underwriting guidelines to

 5   maintain and/or increase loan volume, thereby making the Risk Disclosures misleading.

 6   Moreover, the Registration Statement was false and misleading in that it discussed potential

 7   deviation from underwriting standards as a hypothetical future event and not something that had

 8   already been occurring at the Company for well over a year: “If Accredited’s competitors adopt

 9   less stringent underwriting standards, it will be pressured to do so as well, which would result in

10   greater loan risk without compensating pricing.      If Accredited does not relax underwriting

11   standards in response to its competitors, it may lose market share.”

12          398.    The Registration Statement misleadingly represented that the Company employed

13   “appropriate underwriting policies” and that “Aames’s [historic] higher delinquency rate is due

14   to the lower credit quality of its typical borrower as compared to Accredited’s.” This statement

15   was false and misleading because the Company did not follow its underwriting policies and

16   Aames’s underwriting standards were stricter than those utilized by Accredited at the time of the

17   Registration Statement.

18          399.    The Registration Statement included the false and misleading statement:

19   “Accredited believes that it has qualified personnel at all levels and has established controls to

20   ensure that all loans are originated to the market’s requirements, but Accredited cannot assure

21   you that it will not make mistakes, or that certain employees will not deliberately violate its

22   lending policies.” This statement was false and misleading because the Company did not abide

23   by its “established controls” at the time the Registration Statement was issued.

24          400.    The Registration Statement included the false and misleading assertion that, based

25   upon financial projections for 2006-2009 provided by Accredited’s management, the Company

26   then had an “implied equity value per share” of $55.18 to $88.31. The Company’s true equity

27   value was not in this range, nor would reasonable financial projections for the Company justify

28   any such valuation at that time.

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 1          401.   The Registration Statement incorporated by reference: (i) the Company’s Form

 2   10-K filed with the SEC on March 16, 2006; (ii) the Company’s Form 10-Q filed with the SEC

 3   on May 10, 2006; (iii) numerous of the Company’s Form 8-K filings filed with the SEC between

 4   February 6, 2006 and June 30, 2006; and (iv) any SEC filing between the date of the Registration

 5   Statement and the date of the special meeting of the Accredited and Aames shareholders (which

 6   includes the Company’s Form 10-Q for the quarter ended June 30, 2006 filed with the SEC on

 7   August 9, 2006). These SEC filings contained numerous false and misleading statements,

 8   including the Company’s reported financial results which were in violation of GAAP as set forth

 9   in Section IV.C.

10          402.   Similarly, the Company’s SEC filings misleadingly and falsely assured investors

11   that the Company had rigid underwriting policies designed to ensure the credit quality of the

12   Company’s portfolio, such as this disclosure in the Company’s Form 10-K filed with the SEC on

13   March 16, 2006:

14          Our loan officers and account executives work closely with our underwriting
            group to ensure that the loan applications that they originate meet the quality
15          standards necessary to make it through the underwriting and funding process.
16                                            *       *       *

17          Each mortgage loan that we originate is underwritten prior to loan closing in
            accordance with our underwriting guidelines. We have developed underwriting
18          processes and criteria that we believe generate high-quality non-prime loans.
            Our underwriting guidelines are designed to help us evaluate a borrower’s credit
19          history, his or her capacity, willingness and ability to repay the loan, and the value
            and adequacy of the collateral.
20
                                              *       *       *
21
            Our underwriting process and guidelines require a rigorous application review
22          and documentation designed to maximize the value of our mortgage loans.
23          403.   None of the defendants named in these Claims made a reasonable investigation or

24   possessed reasonable grounds for the belief that the statements contained in the Registration

25   Statement and Prospectus were accurate and complete in all material respects.             Had they

26   exercised reasonable care, these defendants could have known of the material misstatements and

27   omissions alleged herein.

28

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 1          404.    At all relevant times, as detailed above, the price of the Company’s common

 2   stock was artificially inflated as a direct result of defendants’ misrepresentations and omissions

 3   regarding the Company. When the truth about the Company was partially revealed to the

 4   market, the inflation that had been caused by defendants’ misrepresentations and omissions was

 5   eliminated from the price of the Company’s common stock, causing significant damages to

 6   holders of Aames common stock who exchanged their stock in Aames for Accredited common

 7   stock. For instance, Accredited’s common stock reacted to information in the market place,

 8   including, but not limited to, the following:

 9      •   On October 19, 2006, the Company announced higher delinquency rates and lowers 2006
10          earnings projections. Analysts reported management had “lost credibility.” The stock

11          dropped 11% on the day.

12      •   On February 8, 2007 through February 12, 2007, Accredited stock price dropped from
13          $29 to $24.50 in anticipation of the Company’s release of 2006 financial results and as a

14          result of industry news concerning declining credit quality.

15      •   On March 2, 2007, the Company failed to file its Form 10-K with the SEC as required.
16          The stock dropped 3.68%.

17      •   On March 5, 2007, the next trading day after the Company failed to file its Form 10-K,
18          Company was downgraded by Stifel Nicolaus. The stock price dropped 26%.

19      •   On March 12, 2007, after the Company’s stock price dropped 28% on the day, the
20          Company issued a press release, after the market closed, disclosing a liquidity crisis

21          resulting from loan repurchases and margin calls on the Company’s credit facilities.

22      •   On March 13, 2007, the Company’s stock dropped over 65% in response to the
23          Company’s press release and disclosure of a severe liquidity crisis.

24          405.    The declines in the Company’s securities prices following these revelations, and

25   the resulting damages suffered by plaintiffs are directly attributable to the market’s reaction to

26   the disclosure of information that had previously been misrepresented or omitted by defendants,

27   and to the market’s adjustment of the Company’s securities prices to reflect the newly emerging

28   truth about the Company’s condition. Had members of the Class known of the material adverse

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 1   information not disclosed by defendants named herein, or been aware of the truth behind these

 2   defendants’ material misstatements, they would not have exchanged their Aames shares for

 3   Accredited shares at the artificially inflated price.

 4           406.    By reason of the foregoing, defendants named in these Claims violated Section 11

 5   of the Securities Act and are liable to the members of the Class who acquired Accredited stock in

 6   exchange for Aames stock pursuant to the Registration Statement, each of whom has been

 7   damaged by reason of such violations.

 8   V.      SIXTH AND SEVENTH CLAIMS FOR RELIEF – For Violations Of Sections 12(a)(2)
             And 15 Of The Securities Act Against Defendants Accredited, Konrath, Lydon,
 9           Gunderson, Pratt, Erickson, Espy, Berglund And Marvin

10           407.    Plaintiffs incorporate by reference the allegations of the Fourth and Fifth Claims

11   for Relief at ¶¶344-406 above as though fully set forth herein.

12           408.    Lead Plaintiff and Plaintiff William F. Kornfeld (“Kornfeld”) assert these Claims

13   on behalf of themselves and the other members of the Class who acquired Accredited stock in

14   exchange for Aames stock pursuant to the Registration Statement against defendants Accredited,

15   Konrath, Lydon, Gunderson, Pratt, Erickson, Espy, Berglund and Marvin for violations of

16   Section 12(a)(2) of the Securities Act, 15 U.S.C. §§ 771(a)(2). This Claim is also asserted

17   against defendants Konrath and Lydon for violation of Section 15 of the Securities Act, 15

18   U.S.C. §§ 77o, by virtue of their direct and indirect control and domination of Accredited.

19   Defendants named in this Claim caused plaintiffs in the Class to acquire their Accredited shares

20   by use of the Prospectus, included as part of the Registration Statement.

21           409.    The allegations giving rise to these Claims do not rest upon, involve or derive

22   from any allegations of fraud or fraudulent conduct by defendants named in these Claims.

23           410.    By use of the Prospectus, which contained the materially misleading statements

24   and omitted material facts in the Registration Statement as set forth above in ¶¶388-403,

25   Accredited exchanged its common stock for the Aames stock owned by plaintiffs in the Class.

26   The defendants named in these Claims actively and jointly caused to be drafted, revised and

27   approved the Prospectus, which was provided to plaintiffs, finalized it and caused it to become

28   effective. But for these defendants having drafted, filed or signed the Registration Statement

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 1   including the Prospectus, the merger between Accredited and Aames would not have closed and

 2   plaintiffs named in these Claims would not have acquired Accredited shares, as further alleged

 3   herein. These defendants also solicited the exchange of Aames shares by institutional investors,

 4   fund managers and other investment professionals by means of the Prospectus.

 5          411.    Absent the effort by defendants named in these Claims, as set forth above, the

 6   exchange of Accredited shares for Aames shares could not and would not have been

 7   accomplished. At all relevant times, these defendants knew, or in the exercise of reasonable care

 8   should have known, of the material untrue statements in and omissions from the Prospectus, as

 9   set forth above.

10          412.    None of the untrue statements and omissions from the Prospectus as described

11   herein were known to plaintiffs at the time they acquired Accredited shares, pursuant to the

12   Prospectus.

13          413.    By reason of the conduct alleged herein, the defendants named in these Claims

14   violated Section 12(a)(2) of the Securities Act, 15 U.S.C. § 771(a)(2). As a direct and proximate

15   cause of defendants’ violation of Section 12(a)(2), plaintiffs named in these Claims have

16   sustained damages. These plaintiffs seek rescission to recover the consideration paid for their

17   Aames common stock. These plaintiffs hereby tender their Accredited shares, or proceeds from

18   the sale thereof, to defendants named in these Claims in exchange for the value of the

19   consideration paid for such shares, plus interest. In the alternative, these plaintiffs seek recovery

20   of damages in an amount to be proven at trial.

21          414.    This action was brought within one year after the discovery of the untrue

22   statements and omissions (and within one year after such discovery should have been made in

23   the exercise of reasonable diligence) and within three years after the acquisition of Aames by

24   Accredited and within three years after the shares were sold to plaintiffs named in these Claims.

25   VI.    CLASS ACTION ALLEGATIONS – APPLICABLE TO ALL CLAIMS

26          415.    Plaintiffs incorporate ¶¶1-414 of Claims I-VII of the Complaint.

27          416.    Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

28   Procedure 23(a) and (b)(3) on behalf of all those who purchased or acquired the securities of

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 1   Accredited between November 1, 2005 and March 12, 2007 (the “Class”), and who were

 2   damaged thereby. Plaintiffs also bring claims arising under the Securities Act on behalf of all

 3   Class members who acquired Accredited shares issued pursuant to a Registration Statement and

 4   Prospectus for the merger between Accredited and Aames.                Excluded from the Class are

 5   defendants, the officers and directors of the Company at all relevant times, members of their

 6   immediate families and their legal representatives, heirs, successors or assigns and any entity in

 7   which defendants have or had a controlling interest.

 8           417.    The members of the Class are so numerous that joinder of all members is

 9   impracticable. Throughout the Class Period, Accredited common shares were actively traded on

10   the NASDAQ National Market under the ticker symbol LEND. While the exact number of Class

11   members is unknown to Lead Plaintiff at this time and can only be ascertained through

12   appropriate discovery, Lead Plaintiff believes that there are hundreds or thousands of members in

13   the proposed Class. As of November 3, 2006, Accredited had 25,261,309 issued and outstanding

14   shares of common stock. In 2004, Accredited’s REIT subsidiary issued approximately 4 million

15   shares of preferred shares equivalent to approximately $100 million. The preferred shares were

16   traded on the New York Stock Exchange under the ticker symbol AHH.PrA. Prior to its

17   acquisition by Accredited, Aames had approximately 32 million shares outstanding. Record

18   owners and other members of the Class may be identified from records maintained by Accredited

19   or its transfer agent and may be notified of the pendency of this action by mail, using the form of

20   notice similar to that customarily used in securities class actions.

21           418.    Lead Plaintiff’s claims and those of plaintiff Kornfeld are typical of the claims of

22   the members of the Class as all members of the Class are similarly affected by defendants’

23   wrongful conduct in violation of federal law that is complained of herein.

24           419.    Lead Plaintiff and plaintiff Kornfeld will fairly and adequately protect the

25   interests of the members of the Class and have retained counsel competent and experienced in

26   class and securities litigation.

27

28

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 1           420.      Common questions of law and fact exist as to all members of the Class and

 2   predominate over any questions solely affecting individual members of the Class. Among the

 3   questions of law and fact common to the Class are:

 4                     (a)    whether the federal securities laws were violated by defendants’ acts as

 5   alleged herein;

 6                     (b)    whether statements made by defendants to the investing public during the

 7   Class Period misrepresented material facts about the business and operations of Accredited; and

 8                     (c)    to what extent the members of the Class have sustained damages and the

 9   proper measure of damages.

10           421.      A class action is superior to all other available methods for the fair and efficient

11   adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

12   the damages suffered by individual Class members may be relatively small, the expense and

13   burden of individual litigation make it impossible for members of the Class to individually

14   redress the wrongs done to them. There will be no difficulty in the management of this action as

15   a class action.

16   VII.    PRAYER FOR RELIEF – APPLICABLE TO ALL CLAIMS

17           WHEREFORE, Lead Plaintiff prays for relief and judgment, as follows:

18           (i)       Determining that this action is a proper class action and certifying Lead Plaintiff

19   as class representative under Rule 23 of the Federal Rules of Civil Procedure;

20           (ii)      Awarding compensatory damages in favor of Lead Plaintiff and the other Class

21   members against all defendants, jointly and severally, for all damages sustained as a result of

22   defendants’ wrongdoing, in an amount to be proven at trial, including prejudgment and post-

23   judgment interest thereon;

24           (iii)     Awarding Lead Plaintiff and the Class their reasonable costs, expenses and

25   attorneys’ fees incurred in connection with this action; and

26           (iv)      Awarding such other and further relief as the Court finds just and proper.

27

28

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 1   VIII.   JURY DEMAND – APPLICABLE TO ALL CLAIMS

 2           Plaintiffs demand a trial by jury.

 3   Dated: August 24, 2007                        Respectfully submitted,

 4                                                 BERNSTEIN LITOWITZ BERGER
                                                     & GROSSMANN LLP
 5

 6
                                                          /s/ David R. Stickney
 7                                                        DAVID R. STICKNEY

 8                                                 DAVID R. STICKNEY
                                                   MATTHEW P. SIBEN
 9                                                 12481 High Bluff Drive, Suite 300
                                                   San Diego, CA 92130
10                                                 Tel: (858) 793-0070
                                                   Fax: (858) 793-0323
11                                                        -and-
                                                   CHAD JOHNSON
12                                                 1285 Avenue of the Americas
                                                   New York, NY 10019
13
                                                   Tel: (212) 554-1400
14                                                 Fax: (212) 554-1444

15                                                 Attorneys for Lead Plaintiff Arkansas Teacher
                                                   Retirement System and Lead Counsel to the Class
16

17                                                 CHIMICLES & TIKELLIS, LLP
                                                   MICHAEL D GOTTSCH
18                                                 KIMBERLY M. DONALDSON
                                                   361 West Lancaster Avenue
19                                                 Haverford, PA 19041
                                                   Tel: (610) 642-8500
20                                                 Fax: (610) 649-3633
21
                                                   SARRAF GENTILE LLP
22                                                 RONEN SARRAF
                                                   JOSEPH GENTILE
23                                                 485 Seventh Avenue, Suite 1005
                                                   New York, NY 10018
24                                                 Tel: (212) 868-3610
                                                   Fax: (212) 918-7967
25

26                                                 Attorneys for Plaintiff William F. Kornfeld, Jr.

27

28

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Case 3:07-cv-00488-H-RBB   Document 54   Filed 08/24/2007   Page 144 of 145
Case 3:07-cv-00488-H-RBB   Document 54   Filed 08/24/2007   Page 145 of 145

								
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